Spreads

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.