Bond Rates and Their Effect on Mortgage Rates

Posted on November 22, 2007 at 1:41 pm
Filed Under Financial Planning, Mortgage Planning

Today’s bond rates demonstrate the mortgage rates should be on the decline.

My reasoning stems from current Canadian bond markets as this is where mortgage lenders borrow money to lend to their clients. If we look at the last number of years leading up to the U.S. credit crunch, we will consistently see a premium of anywhere between .90% and 1.25% above the bond market yield. If we take a look back at the 5 year bond in the middle of April in 2007, we notice that it was trading around 4.15%. The accompanying 5 year fixed rate at most lending institutions was 5.25%; a difference of 1.10%.

Your Take-Away: If we closely look at today’s 5 year bond we will notice that it’s yield has dropped to 3.781% and the accompanying best rate on a 5 year closed mortgage has increased to 5.94%. A difference of 2.159%. That is almost double what we are accustomed to. If we were to take out the temporary risk premium due to the credit crunch issues in the U.S. we would expect that the 5 year rate should be in a range of 4.681% to 5.031%. Does it make sense to be locking into a 5 year fixed term or for that matter any fixed term at this time? In our opinion, no chance.

The decision is ultimately yours and depends on more variables then simply trying to time the market. That said, now is as good a time as any to seriously consider a variable rate mortgage.

Until next time, have a Terrific Thurday.

Elisseos

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