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Canadian mortgage rates moved higher again last week but it wasn’t because of new economic data or rising bond yields. Instead, one large lender raised rates and everyone followed, repeating a cycle that we have seen several times lately. Over the past couple of months these rounds of follow-the-leader rate changes have shrunk average five-year variable-rate discounts from prime minus 0.60% to prime minus 0.40% and increased average five-year fixed rates from 2.59% to 2.79%.
Market-wide rate changes like these are difficult to predict because they start out as subjective decisions made by one lender that everyone else then decides to follow, and in many cases, the followers have different reasons for raising than the leaders did.
Here are my thoughts on the factors that have led to these recent mortgage-rate increases:
- Lender's funding costs have been rising slowly but surely for some time now. The spreads between government debt and the funding vehicles that lenders use to raise capital for their mortgages have steadily widened as investors assign a higher risk weighting to these types of credit. That said, the overall increase has been relatively small and the spreads associated with our residential-mortgage funding vehicles are still miniscule when compared to the spread swaps on most other forms of credit.