We’re Experiencing Rising Rates – but There’s More to It

August 2, 2022

Key points:

  • Fixed rates hit their peak in June 2022, and have started to drop since then
  • While the bond market anticipates a recession, this means inflation will drop and variable rates will experience relief in the near future

Articles of rising rates don’t capture the whole picture

The Bank of Canada’s actions have prompted endless articles about the impact of rising interest rates, but this doesn’t capture the whole situation. Fixed rates are actually declining, and as anticipation of a recession looms, this means variable rates will follow soon as well. Here’s what you need to know.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:04] Rising interest rates are on everyone’s mind and with good reason because the Bank of Canada is in the midst of a very intense, very defined rate hike cycle caused by inflation. But I’m here to tell you that rising interest rates aren’t a generality. In fact, we’re starting to see some relief specifically when it comes to fixed rate mortgages. 

What influences variable and fixed rates?

Chris: [00:00:27] If you want to understand interest rates, you have to understand the mechanisms that influence variable rate mortgages and fixed rate mortgages. Variable rate mortgages are determined by the prime rate, which is determined in turn by the overnight lending rate as set by the Bank of Canada. Whereas fixed rates are influenced by the Government of Canada five year bond yields. So the direction of the bond yield will determine which direction fixed rate mortgages will trend. Now the view from 50,000 feet is that interest rates, variable and fixed, move in the same direction. But that is not always true. Let me show you.

Fixed rates are dropping, variable rates will follow

Chris: [00:01:08] Here, you can see the chart for the Government of Canada five year bond yield and since it peaked on June 14th of 2022, the trend, as you can see here, is overwhelmingly down. And so what that means is that fixed rate mortgages have started to drop in July. And that is not very well documented because, of course, all the media is focusing on the Bank of Canada prime rate going up. And we’re optimistic when looking at fixed rate pricing and looking at the overall bond market, because the bond market is starting to anticipate a recession and slowdown. And while that in and of itself is not positive, it does signal the end of inflation and a general reset of the economy, which will be very good for interest rates. And so I think if you are in a variable rate mortgage and we are now hearing the news of further increases to the prime rate, I think they will be short lived and relief is on the horizon.

Need more help or information?

Chris: [00:02:12] My name is Chris Molder. I am a Toronto based mortgage broker. If you have any questions about how interest rates are going to impact your mortgage payment or any other questions, I’m just a phone call or an email away. Bye for now. Until next time.

You can book a call directly into my calendar below, or get in touch with me here.