Fixed-rate mortgages are in for a bumpy ride as conflict in the Middle East pushes up interest rates for consumers’ preferred mortgage product — and it’s likely to remain elevated for some time, experts warn.
Since the U.S.-Israel and Iran conflict broke out in late February, the bond yields have been a “roller coaster” with insured five-year fixed mortgage rates going from around 3.9 per cent to 4.2 per cent, said Dan Eisner, CEO of True North Mortgage.
Eisner said the jump is a direct result of the Bank of Canada’s five-year bond yield increasing by around 40 basis points at its peak.
Many factors can impact bond yields but “clearly the rise in oil prices drove them up,” Eisner said.
Once the Iran conflict escalated and oil prices jumped, investors have become nervous that upward pressure could be placed on inflation. Central banks typically hike their key interest rate when inflation increases, so bond yields are rising in anticipation of future key rate hikes, experts said.
Most fixed-rate mortgages are tied to the five-year bond yield, so when the bond yield goes up so does the interest on fixed-rate mortgages.
If oil supply volatility and inflation risks persist, Canadians could face higher fixed-rate mortgages for some time, but they likely won’t continue to increase drastically if oil prices remain around $100 per barrel, he said.
“Right now strategic oil reserves are being used and some more can be released,” Eisner said, adding that will keep interest rates elevated but steady. But if the price per barrel shoots up to $140 then bond yields will increase as well.
The lowest variable-rate mortgage is 3.35 per cent, which has remained unchanged since the Bank of Canada lowered its key interest rate to 2.25 per cent, said Penelope Graham, mortgage experts at Ratehub.ca.
Variable-rate mortgages are tied to key rate changes by the Bank of Canada, meaning variable-rate mortgages move in lock-step with increases or decreases to the central bank’s key rate.
The Bank of Canada is widely expected to keep its key interest rate unchanged on Wednesday during its rate announcement.
“That’s unlikely to change,” Graham said. “It seems like both the Canadian and American central banks are taking a wait-and-see approach to what’s going to happen with the war.”
In Canada, inflation was 1.8 per cent in February, below the target of two per cent — the Bank of Canada would need to see a rise in inflation for at least a few months to trigger a rate hike, Graham said.
As unemployment rises and the economy remains sluggish, the central bank won’t be “super keen” to hike rates unless it’s “really compelled to,” she added.
Victor Tran, a mortgage and real estate expert with Rates.ca, said some mortgage rate shoppers are discouraged by fixed-rate interest rate changes, especially those facing a mortgage renewal who missed the window of lower interest rates.
But, “it’s not the end of the world … it’s still something that we’re kind of used to,” he said, referring to bond market unpredictability that has been occurring over the last year.
If consumers are able to lock into a good deal for the variable-rate then they’re more likely to choose that product, but overall, “most people gravitate toward a fixed rate for that stability up front,” Tran said.
However, Eisner said about half of his clients are picking variable mortgages — though, he doesn’t believe it’s the smartest move due to geopolitical unpredictability.
If homeowners are facing a renewal in the next few months, it’s best to lock into a fixed-rate mortgage just in case the Bank of Canada does have to increase its key rate, impacting variable mortgages.
Then, if variable rates are still better than fixed rates before close, consumers can choose to switch, he added.
