Who decides the future of mortgage rates?

Who decides the future of mortgage rates? - hypotheque

In order to pick the correct mortgage strategy that will save you the most money, you have to understand the factors that are behind interest rates increases and decreases - hypotheque.

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 - hypotheque.

Many borrowers 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 - hypotheque.

The Bank of Canada sets a base rate that determines the prime rate that the major Canadian banks will use. The prime rate is then used by these banks and other mortgage lenders to fix variable mortgage rates.

VARIABLE RATES:

Most people only consider the variable rate. They are excited when they feel they can get a 5 year variable home loan at 4.75%, when the 5 year fixed mortgage rate is 5.4%. This is short sighted, since variable rate mortgages go up and down with the prime rate. If the prime rate is, for example, 5.5%, the mortgage holder with the 4.75% rate really has a rate which is prime less .75%. When the prime rate increases, his variable mortgage rate will increase with it - pret hypothecaire.

The prime rate is fixed by the Bank of Canada eight times per year. The governor of the Bank of Canada, currently David Dodge, makes an announcement at these times whether the rate will increase, decrease or stay the same, then it stays at this new rate until the next adjustment period.

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. (hypotheque)

Increases in the CPI that the Bank of Canada consider inflationary (usually more than 2%) will compel it to increase rates to slow down economic activity and therefore inflation. The GDP indicates how fast the country is growing and is also an aspect influencing inflation and interest rates.

If the economy is growing slowly and has low inflation, the Bank of Canada will tend to lower rates to spur growth; if it is growing strongly and has high inflation, it will raise rates to slow things down - taux hypothecaire.

Fixed Rates:

We can say that fixed rates are determined by banks and lenders, but they in turn are guided by other factors, such as their earnings on investments and their costs of money.

Banks and other mortgage lenders buy and sell the mortgages in their portfolios in a secondary market. They try to maintain balanced portfolios and also to increase the return on them

The chief rival in this secondary market is the bond market. Investors who like to buy mortgage portfolios also like 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 increase, the bank has to increase its mortgage rates to compete. When bond rates decrease, mortgage rates tend to decrease as well. (taux hypothecaire)

Now you understand 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. These players all join in a complex structure that takes a lot of study by experts - taux hypothecaire.

The solution for the non-expert is to find a reliable mortgage counselor to help him through this maze of information and can help him determine how these factors can or should influence his mortgage decisions. Working with a bona fide mortgage counselor will let you find the best strategy with the best rate in your particular situation. (hypotheque)

This is a complicated topic and this is a very simplistic explanation. If you consulted a library or searched on the internet, you would find literally thousands of items on the topic of how interest rates are determined. We will look at the Bank of Canada’s fiscal policy and the fixed income market (taux hypothecaire).

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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