Why do mortgage rates change?
Written by the The Calgary Mortgages .CA Crew
If you are wondering what changes mortgage rates, many factors influence both fixed and variable rates. Some of these include the health and growth of the economy, inflation, and current housing market conditions.
Continue Reading: 5 min Read
What Impacts Fixed Mortgage Rates?
The main factor that impacts fixed rate mortgages is the Government of Canada long term bond yields.
Bond yields and fixed rate mortgages have a positive relationship. This means that fixed mortgage rates tend to increase and decrease in unison with bond yields.
Canadian long term bond yields are highly influenced by US treasury Bonds. Typically, when the US is experiencing a healthy economy, we see some inflation and we start to see bond yields increase. Canada follows suite, and in turn, this drives fixed mortgage rates up a little bit.
We’ve seen much of this in the last 6 weeks in Canada as fixed rates have jumped from about 1.5% to 2%.
If you are a fixed rate mortgage holder, it means that your rate stays the same for the term of the mortgage. This means that your monthly mortgage payment will not change for the entire term of the mortgage, (typically 5 years in Canada).
What Impacts Variable Rates?
Variable rate mortgages are affected by the Bank of Canada’s overnight lending rate. The overnight rate is the cost of lending and borrowing short-term funds in Canada. The Bank of Canada makes 10 announcements per year about whether or not it will increase, decrease or hold the current the overnight lending rate. With this information, the Major Banks and mortgage lenders in Canada determine their “bank prime.” Currently, all major banks and mortgage lenders in Canada have a bank prime of 2.45%, except TD Bank, their bank prime is 2.60%.
Currently, Variable rates are trading at a discount to prime. Prime – 1.0% means a rate of 1.45%.
Variable rates fluctuate with changes to the bank prime. Borrowers should count on some changes to their mortgage payments during the term of the mortgage, up or down!
With an increase in fixed mortgage rates over the last month, Variable rates are becoming more attractive to Canadian borrowers. We’ve seen the “differential” or “discount” to bank prime increase from about -0.50% to -1.0%. This means that Canadians that are taking new variable rate mortgages are starting at a variable rate of 1.45%.
Final Thoughts
Mortgage rates have a huge impact on the overall long-term cost of purchasing a home, choosing between a variable rate and fixed rate is a decision that should be well thought out and discussed in detail with your mortgage broker.
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