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Why Do Mortgage Rates Fluctuate?

Beamsville Mortgage Broker - Why Rates Change

One of the questions I get asked regularly as a Beamsville mortgage broker is why mortgage rates fluctuate so often.  There are some key economic factors that work together which affect mortgage rates in Canada.  Inflation, the housing market, unemployment, and consumer confidence are just a few of these things.

Fixed and Variable Rate Mortgages

The main factor that has an impact on fixed-rate mortgages is bond yields of the Canadian government.  Fixed rates and government bond yields tend to work in tandem.  With a fixed rate you are able to lock in a rate that is predetermined for a specific amount of time, such as a 5-year term.

The way bond prices and bond yields work is that, when there is an increase in bond prices, the government sees a decrease in yields, and vice versa.  A bond is generally seen as safer than sticks where investments are concerned. The bond yield is the return that an investor receives once the bond has matured.

So how does this affect a fixed-rate mortgage?  Well, typically fixed mortgage interest rates will increase and decrease along with bond yields.  When the stock market is doing well we see a decrease in bond prices, and an increase in bond yields and fixed rates.  A booming stock market means bond prices are lower, allowing for investors to buy more of them.

When we see a drop in the stock market we also see bond prices rise and bond yields and fixed rates lower.  This happens when there is less stability in the Canadian economy, making more investors shy away from riskier investments and lean more toward safer ones, such as government bonds.  The demand then rises causing the prices to rise and the yield and fixed rates to drop.

Variable Rate Mortgages

Changes in variable rate mortgage rates are the responsibility of the Bank of Canada, which determine the overnight rate.  Variable rates change borrowing/lending short term funds costs, which impacts the Prime Rate. Since these two are linked, when the prime rate rises so does your variable mortgage rate along with your monthly payments.

The overnight rate is the interest rate that larger banks use when lending or borrowing one-day funds amongst themselves.  This is also referred to as the key policy rate or key interest rate.  So, variable rates and the prime rate are linked.  When one falls or rises, so does the other.  Time for a quick math lesson!

For example, say the current overnight rate was 1.5%, the prime rate of the larger banks was 3.50%, and the variable mortgage rate was -0.50% (making it 3.00%).  Now, the Bank of Canada determines that it will increase the overnight rate by 0.25%, making it 1.75%. All of the banks will follow along and raise their prime rates by the same 0.25%, making it 3.75%.  This means that your variable mortgage rate will change to 2.25% (which is 3.75% minus 0.50%)

How this changes your mortgage is like this:

Say you have a $250,000 mortgage taken over a 25-year term and there was a 0.5% increase.  Your monthly payments would go up by around $30 a month.  That may not seem like a great deal, however, if it went up by 3 to 4% it would make a much bigger impact.

You can see that there are several things that affect mortgage rates at any given time.  If you want to get the best mortgage rates possible, visiting one of our Beamsville mortgage brokers is the place to start.  We know what is happening in the market and the economy, so we can better advise you regarding when to take out a mortgage.  We will also be able to get you the best mortgage package possible. 

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