How Are Fixed Rate Mortgages Set?

The above image is of the Canadian Bond yield vs. the 5yr fixed mortgage rate from February 13th 2009 until the present June 12th as published by Canadian lender Merix Financial.

The bond yield, or rate of return on your bond, is depicted by the blue curve on the graph above while Merix's fixed 5 year is the green curve. As a consumer if you want to know which way fixed rates are moving you want to pay attention to the spread between current fixed rates and the bond yield. Mortgage lenders set their fixed 5 year based on a spread between 1.70 to 1.80%.

So if we look at Merix's fixed 5 year rate of 4.49% and compare it to the current bond yield of 2.71% the spread is 1.78% right on target. (4.49-2.71=1.78)

So what you need to watch for is if their is an increase in bond yields then the spread will continue to shrink and that could cause interest rates to rise.

In summary: Canadian 5 yr bond yields -03bps to 2.71- Four weeks ago it was 2.21. The spread, based on new 5 yr rate of 4.49%, is back in the target zone at 1.78%.