In the past year, the bond market has been a battleground, reacting to persistent inflation and pushing fixed-rate mortgages higher. The Bank of Canada's firm stance on the prime rate until 2024 has added to the complexity.

For those mortgages matured in 2023, the reality has been renewed at higher interest rates, contributing further to inflation. This impacts both fixed and variable rates, as the bond market closely observes the BoC's key policy rate.

Bond Yields Have Dropped Recently – What It Means

The recent drop in bond yields can potentially bring relief for those entering the housing market or facing mortgage renewals. Understanding this trend provides valuable insights into mortgage rate decisions.

The 5-year Government of Canada bond yield has seen a significant decline, giving hope for interest rate relief in 2024. However, it's crucial to note that the correlation between bond yields and fixed mortgage rates isn't a direct 1:1, and lenders may exercise caution in fully reflecting the bond yield drop in mortgage rates.

Fixed Mortgage Rates: Renewals vs. Buying a New Home

For those renewing mortgages, the drop in fixed rates offers some relief, albeit with rates still higher than previous terms. However, for potential homebuyers, the decision is more nuanced. Experts caution against expecting significant rate falls in the near future.

Potential buyers are advised to be comfortable with today's fixed rates, considering any reduction as a bonus rather than a guaranteed future outcome. Attempting to switch from a fixed-rate mortgage due to rate drops could incur prepayment penalties, and switching lenders involves passing the stress test.

The Bottom Line

Bond markets are in constant flux, influencing fixed mortgage rates. While rates are currently down compared to October 2023, Canadians looking to renew or purchase homes can benefit from lower fixed rates