Who decides the future of mortgage rates? - hypotheque

It is going to be difficult to choose the right mortgage strategy for your circumstances and that will save you the most money if you don’t understand what influences interest rates in the first place (pret hypothecaire).

The subject of interest rate changes is a complicated and convoluted one involving the monetary policy of the Bank of Canada and the movement of the bond markets that can (and has) fill hundreds of books. Let’s try to keep it simple here - pret hypothecaire.

Many consumers may believe that their banks determine interest rates. Banks only set interest rates based on other rates and factors that they are faced with. In general, variable rates are determined by the prime rate, and fixed rates are determined by the interest rates in the bond markets - taux hypothecaire.

The Bank of Canada sets a base rate, and that determines the prime rate the major banks in Canada set. This then sets the rates on variable rate home loans.

Variable Rates:

A lot of people just look at the rate they are offered at the beginning of a variable rate loan. They are thrilled that their variable rate is 4.75% when the rate on a fixed rate loan is 5.4%. They do not see yet that their rate can increase every time the Bank of Canada raises the prime rate, which can happen eight times per year. This is because variable rate mortgages are actually determined by the prime, so the rate we cited above is .75% below the prime. When the prime goes from 5.5% to 6%, the variable rate will go from 4.75% to 5.25%. (pret hypothecaire)

The Bank of Canada fixes the prime rate eight times a year at certain set intervals. Depending on a number of factors, it may raise or lower the rate, or leave it unchanged. Then the it remains at this new rate until the next interval.

The prime rate is used by the Bank of Canada to manage growth and inflation. The consumer price index (CPI) and the gross domestic product (GDP) are the tools that BOC uses to determine the prime rate. (pret hypothecaire)

Strong increases in the CPI (2% or above) signal inflation and the Bank will tend to increase rates to forestall inflationary tendencies. GDP measures the country’s economic activity and is also influenced by inflation, so it is a factor that the Bank of Canada watches to determine rates.

If the GDP and the CPI have slow rates of growth, the Bank of Canada will most likely lower rates to encourage investment and purchases and conversely if they are growing strongly, they will increase rates. (pret hypothecaire)

Fixed Rates:

Each lender does, in a way, fix its own fixed lending rates, but they are also keenly influenced by factors outside their control: earnings and cost of funds.

Lenders such as banks and mortgage companies trade the mortgages they originate on a secondary market. They do this fairly constantly to balance their portfolios and try to get the best return for them.

The competition in this secondary market is the bond market. Investors who like to buy mortgage portfolios also prefer to buy bonds. They are “fixed market” investors. So the banks have to keep their rates on their mortgages competitive with the bond market. If bond rates go up, the bank has to increase its mortgage rates to compete. When bond rates decrease, mortgage rates tend to decrease as well. (pret hypothecaire)

Now you see that the interest rate you will pay on your home loan is determined by decisions made by banks, lenders and investors in the bond markets, the Bank of Canada, the CPI and the GDP. It is all linked in a complex structure that takes a lot of study by experts - taux hypothecaire.

What can an average consumer do? The best solution is to work closely with a qualified mortgage consultant who understands all of the implications of these factors and how they will influence your unique borrowing requirements. Only an accredited mortgage broker is able to clarify these interest rate (as well as other) issues and determine what your strategy should be. (taux hypothecaire)

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Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage

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