How bond yields affect fixed rates

How do bond yields affect fixed-rate mortgages? The mortgage industry and the bond market are closely tied together, but it can be complicated to understand their relationship. Here’s a brief overview of government bonds, bond yields, and how they affect fixed rates in the mortgage world.

Government bonds and bond yields

Government bonds are products you can buy as a form of investing with the Bank of Canada. Buying a bond yield means you give your money to the central bank, which it will then use for government spending. In turn, the bank will pay you interest. When your bond reaches maturity, you will be paid back the entire principal amount. People choose to invest in government bonds because they are one of the most secure forms of investing. The government backs your investments and is responsible for paying you back. The only major downside is since these bonds are low-risk, they are also low-reward. People who buy government bonds shouldn’t expect to make a fortune with their investment.

A bond yield is how we measure the annual return on a bond investment, and it is measured as a percentage. Calculating bond yields can easily get confusing, as it depends on the individual value of the bond, as well as when they are bought and sold. However, if you’re wondering how bond yields affect the mortgage industry, this is a bit easier to understand.

Impact on fixed-rate mortgages

Unlike variable-rate mortgages, which are determined by the Bank of Canada’s interest rate decisions, fixed rates depend on bond yields. When bond prices increase, bond yields decrease, and vice versa. Fixed rates run in the same direction as bond yields. When bond yields increase, investing in mortgages as a lender is less desirable. As a correction, mortgage rates increase as well to give lenders a benefit for investing. These changes happen pretty quickly in the mortgage industry as bond yields move.

Let a broker be your guide

It’s important to understand that even though lenders will raise their rates as bond yields increase, they won’t all increase by the same amount. It depends on the lender, the product, and the timing. That’s why using a mortgage broker in the market is essential! It’s hard to examine a bunch of lender rates and understand which one is best for you without some extra guidance. Most buyers, especially first-time home buyers, will get easily frustrated and confused. Brokers are able to walk you through your situation and compare it to current lender offerings to find the product that is the right match for you. Keeping an eye on bond yields is a great place to start, but bringing in a broker will be your best solution.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.