Bond Yields Decreased, Shouldn't Fixed Mortgage Rates?
What is the relationship between bond yields and fixed mortgage rates?
Bond yields guide our fixed mortgage rates. If bond yields increase, our fixed mortgage rates will increase. When bond yields decrease, our fixed mortgage rates decrease. They have a positive relationship with one another.
Why do bond yields and fixed mortgage rates have a relationship?
Profit margin for the banks. The bank earns money from lending their money out through mortgages, personal loans, etc. However, banks also collect deposits from customers and must pay them a small interest. The ratio between the money that is collected from lending and the money that is paid to customers for depositing is called the bank spread. This bank spread can indicate the bank's profit margin. So, if they're paying clients more on deposits, then they will be charging their borrowers more.
Bond market has decreased, so shouldn't fixed rates? In 2018, we experienced stricter lending guidelines and mortgage policies tightening. Many banks have been settling for a smaller profit margin. Although we've seen bond market decrease in the past few months, we have yet to see fixed rates decrease!
What should we see in the Spring Market?
We should expect another rate hike -- which will increase our variable rate. However, because we know that banks won't be decreasing their fixed rates during the slower Winter market, we may expect a decrease in fixed rates in the Spring market! Banks can fill their pockets with a higher profit margin in the Winter, and slash their rates in the Spring to compete for a share in the busy market!
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