Mortgage professionals should develop as comprehensive an understanding as possible
As Canada’s mortgage market continues its pronounced shift from the red-hot activity of the last two years, the value of comprehensive knowledge and market education has arguably never been greater for brokers and agents in guiding their clients through uncertain times.
Among the leading indicators of where the economy – and fixed mortgage rates – are headed are bond yields, which are crucial for mortgage professionals to understand but often difficult to explain in a concise way to clients, according to TMG The Mortgage Group agent and former financial planner Ryan Sims.
He told Canadian Mortgage Professional that while the booming market of the pandemic had been relatively straightforward for brokers, with consistently low interest rates and huge demand for both purchases and refinances, it was now essential that they have a strong grasp of complex subjects to advise customers on where the market was headed.
“Bonds matter to mortgage brokers – but only certain parts. We need to know what relates to mortgage brokers, and I find that it’s really a struggle sometimes to get [it] broken down that simply,” he said. “I don’t think a lot of people understand how important those bond yields can be to their business.
“And we haven’t had to for so many years because housing has been on a bull run like nothing we’ve ever seen before. I don’t think people understand what the bond yields are telling them, and what the bond market is telling them is that things may not be this good for much longer.”
Government bonds are useful in helping economists and market observers judge the trajectory of the economy, while five-year fixed-rate mortgages are tied to the bond yield on Government of Canada bonds with a spread of 1-2% added on.
Effectively an IOU, government bonds see investors lend money to the government and receive an interest payment every six months, followed by repayment of the full principal at maturity or end of term.
The so-called yield is the return provided to the investor in percentage terms, consisting not just of received interest but the bond’s market price – what it would currently sell for – and its value (what the investor paid for it).
Those government bonds are usually viewed as among the safest types of investment, and often surge in popularity during economic uncertainty or strife. Generally speaking, bond yields rise when demand falls as bond prices also decline, while increased demand leads bond prices to rise and yields to fall.
Canada’s five-year government bond yield has plummeted in recent weeks. Sitting at a peak of 3.59% in mid-June, it now hovers at just over 2.80% amid a maelstrom of speculation about a likely recession looming in the distance.
The decline illustrates possible fears that Bank of Canada rate hikes are having a negative impact not just on the housing market and Canadians’ personal finances, but the overall economy as a whole, and represents a much gloomier outlook than that which prevailed in June.
That’s significant because it arrives at a time when many major banks in Canada are advising their clients to lock into a fixed rate as variable interest rates – influenced heavily by those central bank rate hikes – shoot upwards and inflation continues to spike.
It also increases the likelihood of cuts to five-year fixed mortgage rates among major lenders, although most have been slow to drop those rates despite falling bond yields.
“You’re hearing a lot of analogies to the 1980s: people lose their houses, complete economic destruction,” Sims said. “So [banks are saying] you should lock into this fixed rate right now.”
While that may be the case for some borrowers, there’s a strong case to be made for variable rates – and it’s incumbent on brokers to ensure they can present information that allows their clients to make decisions carefully and rationally, he added, rather than basing their choice on emotion or fear.
“Banks make more money on fixed rate products, so they’re naturally going to try and suggest a fixed rate term to a client,” Sims said.
“I think good brokers and agents out there are able to use facts to overcome fear. But you can’t use facts if you don’t have education, and the knowledge to know how to use those facts.”