Why are Interest Rates going up?

Interest rates have risen in the past few weeks and many people are wondering why, because the Bank of Canada has not raised interest rates!  This is true the Bank of Canada continue to keep the prime interest rate at an all time low and for the foreseeable future will continue to do so.

So, why are interest rates going up?  The prime interest rates generally affect the floating mortgage products such as lines of credit and variable rate mortgages as they are tied to prime. However, the long term mortgages are tied to Bond rates.

Many people are not aware of Bonds and don't really understand how this is tied to Mortgages. Well, in the past the Banks used to provide the majority of mortgages in Canada and they would get their money from people investing into Guarantee Investment Certificates or GIC.  The bank would pay a nominal amount of interest to these people and then turn around and invest this money to borrowers at a higher rate.

However, in the late 90's the Canada Bond was created where investors can purchase bonds that are Guaranteed by CMHC and are risk free as CMHC is really backed by the Government of Canada. These bonds trade on the stock markets and do fluctuate daily depending on economic news, investor confidence, turmoil etc.

Government bond yields are inversely related to demand: as the economy soured late last year, investors flocked to the safe haven of government debt, pushing yields down. Now, as the economy begins to show signs of improvement, demand for government bonds is shrinking, pushing yields up - and fixed mortgage rates along with them.

The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch.  If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Ideally lenders are looking for a new spread between 1.80 and 2.00 which is higher than the past few years where the spread was around the 1.25.

The Bank of Canada post the bond rates on a daily basis and by looking at this one can predict if interest rates will be heading higher or lower http://www.bankofcanada.ca/en/rates/bonds.html



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Roy Singh

Roy Singh

Sales Representative
CENTURY 21 Heritage House Ltd., Brokerage*
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