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Interest rate hike

Fixed mortgage rates surge higher as bond yields break above 4%

Bond yields broke through a key resistance point this week, leading to a fresh round of fixed mortgage rate increases.

The rise in yields came following the release of higher-than-expected headline inflation in July, while rate watchers say debt concerns in China were also a contributing factor.

“Fixed mortgage rates will continue their upward spiral based on multi-decade highs in Canada bond yields,” tweeted rate expert Ron Butler of Butler Mortgage.

Lenders continued to increase rates throughout the week, including RBC and CIBC. The average nationally available deep-discount 5-year fixed rate is now 5.49%, according to data from Just two months ago, the average rate was 5.07%.

“Bond yields are now holding over the 4% range, so we’ll probably see fixed mortgage rates go higher—at least for the next few weeks,” Ryan Sims, a TMG The Mortgage Group broker and former investment banker, told CMT.

“I am also noticing that lenders are baking in risk premiums to the fixed rates, which in my opinion is a result of the uncertainty and problems brewing,” he added. “Spreads are extremely healthy right now. Even if bond yields come down, it may take a while to reflect in mortgage rates as lenders keep spreads high to compensate for risk.”

Rate pain for those with upcoming renewals

For existing borrowers with upcoming renewals, Butler said the current rate situation is “all bad news.”

“Every rate will be either in the 6% range, with some terms in the low 7% range,” he noted. “Most of those renewing are coming off rates in the 3% range, so for most this will represent a doubling of their mortgage interest.”

The rise in fixed rates, as well as the higher rates for variable-rate mortgages following the Bank of Canada’s latest round of hikes, are also sending more prospective buyers back to the sidelines.

New mortgage growth “grinded to a halt” with residential mortgage credit outstanding up just 0.17% in May, noted Ben Rabidoux of Edge Realty Analytics. He said that’s the lowest monthly growth since 2011.

More evidence of that came out in the Canadian Real Estate Association’s (CREA) monthly report for July, which showed a slowdown in resale activity. And that trend looks set to continue in August.

“Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada’s mid-July rate hike and messaging regarding above-target inflation for longer than previously expected,” noted Shaun Cathcart, CREA’s Senior Economist. “We’re probably looking at another round of ʻback to the sidelines’ for some buyers until there’s a higher level of certainty around interest rates going forward.”

The latest Bank of Canada rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

While July’s hotter-than-expected inflation reading is keeping an additional Bank of Canada rate hike in play for its September 6 meeting, market odds of another quarter-point hike have now fallen to 35%.

  Target Rate:
Year-end ’23
Target Rate:
Year-end ’24
Target Rate:
Year-end ’25
5-Year BoC Bond Yield:
Year-end ’23
5-Year BoC Bond Yield:
Year-end ’24
BMO 5.00% 4.25% (+25bps) NA 3.65% (+10bps)
3.15% (+10 bps)
CIBC 5.25% (+25bps) 3.50% NA NA NA
NBC 5.00% 4.00% (+25bps) NA 3.55% (+15bps) 3.10% (+10bps)
RBC 5.00% 4.00% (+25bps) NA 3.50% (+20bps) 3.00% (+25bps)
Scotia 5.00% 3.75% NA 3.65% 3.60%
TD 5.00% 3.50% NA 3.55% 2.70%