Mortgage rates are on the rise. This has been the growing trend over the past year. While normally a small rate increase wouldn’t be newsworthy, each little hike becomes increasingly more impactful with Canadians carrying record levels of household debt, record high house prices, and record low interest rates. It’s a concoction that has the whole world watching the Bank of Canada.

Just last week the Canadian unemployment rate fell to 5.7% a 40 year low. This has put further pressure on the Bank of Canada to hike interest rates by another 25 basis points.

As of today the odds of a Bank of Canada rate hike on January 17 sit at 86%. Further, the 5 year Canadian bond yield (which is closely correlated to 5 year fixed mortgage rates) has jumped, now hovering around 2%, the highest it’s been since 2013. Up nearly 75% from a year ago.

Canada 5 year Government bond yield
Canada 5 Year Government Bond Yield

Naturally, this has pushed up 5 year fixed rates at RBC from 3.39% to 3.54%.

More importantly, this has prompted several of Canadas big banks to increase their overnight lending rates (the one’s used to stress test) prior to the Bank of Canada announcement next week.

Both RBC & TD raised their overnight lending rate to 5.14% from 4.99%, with other big banks expected to follow. This is critically important as it will raise the new minimum requirement for all Canadian borrowers, who as of January 1, are required to pass a mortgage stress based on that rate, regardless of their downpayment.

For example, despite getting a variable rate mortgage for say 2.5%, the borrower will have to undergo a stress test at the overnight rate of 5.14%. Again, this typically reduces borrowing power by about 20%.

However, this latest increase from 4.99% to 5.14% would reduce borrowing power by an additional 1.4%.

We now live in an environment where every rate increase matters. Following Canadian bond yields and the Bank of Canada will be an important task in 2018, and it affects all of us.


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