Kiyoko Fujimura

Buzzbuzzhome Corp.
April 6, 2010

For many homeowners, rate hikes last week probably came as a complete shock. And, let’s face it, most people’s best guess as to when rate hikes will occur is about as good as a magic eight ball. But it doesn’t have to be that way! But how?

Look at bond rates! There is a common misperception that fixed mortgage rates are tied to the Bank of Canada’s overnight lending rate (the one that Mark Carney, Governor of the Bank of Canada, keeps hinting he’s going to raise in the summer). But they are more closely tied to the government bond yields which have been increasing over the past six weeks.

Bond traders are expecting the Bank of Canada to either raise rates sooner than the planned date of July 20 or be more aggressive in raising them than previously anticipated. Typically, the bond market moves two to four months before the Bank of Canada does. The Financial Post

Why do they move in tandem? Banks can essentially borrow at the five-year posted rate, and then lend at the that rate plus 90-110 basis points (.9-1.1%). That spread is the bank’s profit Pretty sweet gig, huh? Borrow at a lower rate then lend at a higher one! But I guess they have to deal with all that delinquency, fraud, and yada yada. Okay, banks still provide a valuable service. But ANYWAY!

You’re probably wondering, “How the *$#@ do I put this into practice?” Look at the yield on 5-year government bonds. If the spread between that rate and the 5-year fixed mortgage rate is large, then rates will go down. If the spread becomes too small then rates will go up. It really is that simple! Don’t believe me?

Since 1980 there has been a 97% correlation between the two rates on a monthly basis. The Financial Post

So give it a shot! Be a bit more financially savvy. If it looks like the spread is getting large and rates are likely to go down, stick with a variable rate for the time being and then lock-in after rates decrease.

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