Fixed mortgage rates rise as bond yields climb, spread narrows

The lowest five-year fixed rate for an insured mortgage has risen to 4.34 percent, up from 3.94 percent a month ago. For refinances and other uninsurable mortgages, the lowest rate has climbed to 4.64 percent from 4.24 percent over the same period. Fixed mortgage rates are driven largely by bond yields, which have been rising globally. While the Bank of Canada's policy rate influences variable rates, fixed rates follow the cost of government bonds.

Lenders base their fixed mortgage rates on the yields of Government of Canada bonds with matching terms. A lender offering a five-year fixed rate faces the risk that its own borrowing costs could rise during that term. To fund mortgages, lenders raise money through deposits and mortgage-backed securities, and they use tools like interest rate swaps for protection. Their costs closely follow five-year Government of Canada bond yields because a fixed-rate mortgage shares features like fixed payments over a set term, though it is riskier due to potential borrower default or early repayment.

On top of the bond yield, lenders add charges for credit risk, hedging, operating costs and profit. The gap between the mortgage rate and the bond yield is called the spread. Insured mortgages carry the lowest rates because mortgage default insurers assume the default risk. The spread varies by lender, and competition has kept it lower this year than in previous years.

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In the past 12 months, the five-year bond yield has climbed about 80 basis points, in line with rising global yields. Over the same period, the lowest five-year fixed mortgage rate rose only about 45 basis points, indicating a narrower spread. Part of the reason for the competitive spread is lenders chasing the wave of mortgages from 2020 and 2021 that are coming up for renewal. Another factor may be lenders' belief that yields could fall if geopolitical tensions, particularly in the Middle East, ease.

Fixed mortgage rates follow bond yields, but they change more slowly. Bond yields move almost daily, while lenders typically adjust mortgage rates only once every week or two. Lenders are also quicker to raise rates than to cut them. If bond yields hold at current levels, mortgage rates may edge up further. If yields fall, relief for borrowers will likely come more slowly than the recent increases did.

According to data from WOWA.ca, a simple rule of thumb for estimating the lowest available five-year fixed rate is to take the average five-year bond yield over the past two weeks and add 0.8 to 1.0 percentage points. For the lowest five-year insured rate, that gap averaged about 1.0 percentage point in 2025 and about 0.8 percentage points so far in 2026. A rate well below that range is likely to rise soon. Hanif Bayat, CEO and founder of WOWA, provided the analysis.

With files from The Globe and Mail