Recently, there has been a lot of talk about mortgage rates going up, this seems to be the general consensus, but the only reason for this increase that I keep hearing is “it can’t be this low forever”.  Since I’m in the market to buy a condo in downtown Toronto for myself, I decided to do some more research on this topic and will share what I learned. Conventional mortgage rates follow bond yields very closely. Here’s an example using the past 10 years worth or weekly rates; both the 2-year bond yield (GRAY) and 1-year fixed conventional mortgage rate (RED). Please do not confuse bond yield with bond interest rate, as mortgage interest rates have an inverse relationship with bond interest rates.

The question then becomes: what causes the bond prices to rise and yield to decrease?
The answer to that question is quite complex, but in simple words, when government backed bonds are perceived as the safest investment, prices of bonds increase (thereby reducing their yield since they pay a set amount of interest no matter what the price).  This can be seen in the recent economic melt-down; where subprime mortgage-backed securities turned out to be overpriced, investors turned to bonds to keep their money safe which drove yields downward.

When will they go up?
In the chart it’s evident that the bond-yield has reached the bottom and it’s slowly starting to recover (gray line). This means that mortgage rates will soon follow and slowly start to increase by June 2010. As the economy recovers, so will the bond yield and therefore you and I will need to pay more interest on money borrowed in the form of a mortgage. After reading numerous reports, my prediction is that we will see only a slight increase in interest rates during 2010 since the economy will not recover overnight. Will this be a good enough reason to abandon the all-time low variable rates in favor of a 5-year fixed mortgage? I will explore that in Part 2 of this series.

This entry was posted on Saturday, January 30th, 2010 and is filed under Landlord News, Rental Tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.