At Canadian Mortgages Inc., we are often approached by customers wondering how mortgage rates are determined, and having this knowledge will equip you to make informed decisions regarding your home, your mortgage, your finances, and your future. Having a basic understanding of interest rates and mortgage economics is imperative when choosing a home financing product, and knowing how rates are calculated will help you determine the best time to obtain a mortgage. Our knowledgeable and trained brokers can show you the relationship between the economic market and the toll it could take on your home financing, and help you assess the best time to apply for a mortgage.
The biggest influence on a fixed-rate mortgage is the bond market, which the chartered banks use to determine their mortgage rates. A mortgage and a Government of Canada bond are two investments that banks use to generate profits. But there are many differences between these two types of investments, and banks use bonds as a security against losses in their mortgage departments. Bonds are:
On the other hand, when a bank lends money for a mortgage, they are:
Banks, therefore, calculate the interest rates on the money they lend (fixed mortgage rates) based on the interest rates they are getting on the money they have invested (bond rates), and use their forecasted earnings from bond investments to cover the costs and possible losses incurred through a mortgage. Consequently, the more lucrative the bond market and the higher the bond rates, the lower your fixed-rate mortgage will be.
Unlike fixed-rate mortgages, the interest rates on variable-rate mortgages are affected by changes in the Bank Rate and the overnight rate, which are set by the Bank of Canada. Every bank uses the overnight rate to determine their own prime rate, and since most variable-rate mortgages fluctuate with a bank’s prime rate, there is a direct correlation between the overnight rate and the interest rate on variable mortgages.
The brokers at Canadian Mortgages Inc. are trained to track and understand the bond market, the Bank Rate, and the overnight rate, and can explain how your fixed and variable mortgage rates are affected by fluctuations in each. Our mortgage experts will answer your questions about how mortgage rates are determined, and can assess your own financial circumstances, the changing mortgage rates, and help you determine the best time to obtain your home financing.