In a positive shift for those seeking mortgages, the market is experiencing a notable resurgence in sub-5% fixed mortgage rates—a departure from the trends observed since last spring. Recent drops in bond yields have spurred mortgage providers nationwide to respond with rate cuts, marking the beginning of a renewed era of affordability for potential homeowners.
The Impact of Bond Yields
The 5-year Government of Canada bond yield has undergone a significant decline of 38 basis points (bps) or 0.38% since early last week. This trend, extending from the peak in bond yields in early October, signifies a nearly one percentage point decrease. Consequently, mortgage providers have adjusted their rates by 20-30 bps, with major players such as Scotiabank and CIBC showcasing reductions averaging around 20 bps.
Financial Implications
While a quarter-point (0.25%) rate decrease may appear modest, its real-world impact is substantial for borrowers. For every $100,000 of mortgage debt with a 25-year amortization, the monthly payment could decrease by approximately $13. This development is pivotal as today's rate shoppers can now explore condition-free 5-year fixed rates below 5%, a feat not witnessed since the spring.
Prominent Rate Drops
Some mortgage providers have taken a significant stride by reducing its insured 5-year fixed product by 30 basis points, presenting a market-leading rate of 4.99%. This rate is specially designed for purchases with a down payment of less than 20%, coupled with "tight underwriting." Industry experts foresee other lenders and brokers following suit, capitalizing on the favorable drop in bond yields.
Market Dynamics and Borrower Behavior
Over the past year and a half, the upward trajectory of mortgage rates prompted borrowers to shift away from 5-year terms, leaning towards shorter durations in anticipation of lower rates at renewal. According to data from CMHC, 51% of borrowers in the third quarter opted for fixed-rate terms between three and five years, while 17% chose 5-year (or longer) fixed rates.
Mortgage Renewal Concerns Eased
The recent decline in bond yields and the subsequent, albeit gradual, reduction in fixed rates provide relief for those apprehensive about the looming "renewal cliff." This extensively covered phenomenon refers to the substantial volume of mortgages set to renew over the next three years. Each drop in rates contributes to alleviating the potential payment shock faced by borrowers.
Mortgage Rates Continue to Drop - Good news!
While the return of sub-5% fixed mortgage rates is a promising development for homebuyers, industry observers remain watchful of the factors influencing the rate environment. The current landscape, shaped by bond yield fluctuations, presents both opportunities and challenges for those navigating the mortgage market. As the industry adapts to these changes, prospective homeowners may find themselves in a more favorable position, with the prospect of continued rate improvements on the horizon.
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