Put simply, a “spread” is the difference between two rates.
Mortgage lenders maintain a spread between the rates they offer consumers and the lenders’ cost of funds.
The following can be used as a starting point (base) when determining a lender’s cost of funds:
- For fixed mortgages: The corresponding government bond yield
- For variable-rate mortgages: The 30-day bankers’ acceptance yield
In reality, however, most lenders’ base funding costs reflect a blend of funding sources, such as deposits, GICs, Canada mortgage bonds, covered bonds, etc. In addition, lenders sometimes fund longer-term mortgages with shorter-term assets.
Keep in mind, bond yields and bankers’ acceptance yields represent the “base” cost of funding a mortgage. On top of that lenders incur a slew of other costs related to liquidity/risk premiums, underwriting, overhead, marketing, compensation, administration, securitization, hedging, etc.
In the financial markets, there is also a thing called a “credit spread.” A credit spread is the difference between a government Treasury security and another non-Treasury credit instrument.
For example, a commonly quoted credit spread in the mortgage market is the “CMB spread.” This reflects the difference between Canada Mortgage Bond yields and the corresponding government bond yield.
