It’s been a month since Donald Trump stunned the world by beating Hillary Clinton and his presidential win is already affecting many Canadians. Who else but Donald could wipe out more than 1 Trillion dollars in the bond market [1] as investors worry about his campaign promises to cut taxes and take on massive amounts of debt?

But what does this have to do with Reverse Mortgages in Canada?

Bottom Line: they could become more expensive. In fact, all mortgages in general could become much more expensive, relative to the low-interest rate environment that has surrounded Canadians for over a decade.

Bond Market = Funding Source of Mortgages. One of the primary funding sources for banks’ lending out money is the Bond Market. Banks make their money on the spread between how much interest they have to pay investors to borrow money and how much interest they charge clients on their mortgage. When banks costs increase, it usually translates into an increased cost to consumers.

Bonds are a bit tricky to wrap your head around at first, but it is an interesting global market (accounting for over 100 Trillion Dollars [2]), and it’s worth getting the basics down.

One of the most important things you need to know about bonds: the value of bonds moves in the opposite direction to interest rates. When interest rates rise, the value of bonds becomes lower.

To help illustrate, I’m going to use a very basic example using a 10-Year Canadian Bond:

If you purchased a bond 5-years ago for $1,000 that was earning 6%, and sold it on the bond market today when interest rates were only 2%, would you sell your bond for $1,000? No, it would be worth much more to investors as they can only purchase bonds earning a 2% yield.

Now, let’s say you purchased a bond today for $5,000 that was earning you 2%. If, in 5-years from now, rates rose to 4%, what do you suppose would happen to the value of your bond? Right! It would be worth far less, as you’d be selling investors a bond that is earning them less than they can purchase on the market.

Donald Trump’s talk of issuing massive amounts of debt, cutting taxes, trade wars and higher tariffs, has investors very worried about interest rates rising – and rising interest rates has the bond and the mortgage markets worried.

BMO Bank of Montreal senior economist, Sal Guatieri, is quoted: “The market has really re-priced interest rates higher right across the yield curve, and some of those pressures have spilled over to Canada as well. We’re seeing our 10-year Government of Canada bond yield now up about 30 basis points compared with before the US election. So that’s a pretty meaningful move in long-term rates over such a short period of time”.

By coincidence, RBC Royal Bank has raised its 5-year fixed rate by 30 basis points which goes into effect tomorrow. What does this mean to the 5.78 million seniors living in Canada? If they own a home and are looking into a reverse mortgage, locking into a 5-year fixed rate might be a good option for consideration.

If you are considering a Reverse Mortgage for yourself or a loved one, contact the mortgage professionals at Dominion Lending Centres.

*A version of this post was originally published by Roland Mackintosh on LinkedIn Pulse.

1. http://www.reuters.com/article/us-usa-election-bonds-idUSKBN1380VP
2. http://www.zerohedge.com/news/2016-11-01/did-100-trillion-global-bond-bubble-just-burst

Courtesy of Roland Mackintosh – Business Development Manager, HomEquity Bank