Business Who decides the future of mortgage rates? - hypotheque
This is a complex topic and this is the most rudimentary explanation. If you visited 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 (hypotheque).
A borrower may think that it is the bank that is controlling what his interest rate on his mortgage will be. The bank is really only reacting to the factors in the economic arena that determine mortgage interest rates:
-Variable rates are determined by the prime rate - pret hypothecaire. -Fixed rates are determined by the bond market.
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 determine variable mortgage rates.
Variable Rates:
A lot of people look only 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 may be 5.4%. They do not realize 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 priced in relation to 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%. (hypotheque)
The prime rate is established at certain intervals eight times per year. This is when the Bank of Canada fixes a new rate that may increase, decrease or remain the same in comparison to the old one. It stays at this new level until the next adjustment period.
The factors that influence the Bank of Canada in determining whether to raise or lower the prime rate are numerous, but the main two are the CPI (Consumer Price Index) and the GDP (Gross Domestic Product). - hypotheque
Strong increases in the CPI (2% or above) mean 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 keeps an eye on 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 but, on the other hand if they are growing strongly, they will increase rates. (pret hypothecaire)
Fixed Rates:
It can more easily be said 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.
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 investors the banks sell these mortgages to also invest in the bond market, so the secondary mortgage market has to keep up with the bond market. If the rates in the bond market go up, the banks will have to offer higher rates on their mortgage portfolios by increasing the rates on the mortgages they write. When the rates on the bond markets decrease, the fixed mortgage rates can come down to be in line with them. (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. It is all linked in a complex structure that takes a lot of study by experts - taux hypothecaire.
What does an average consumer do? The best solution is to work closely with a qualified mortgage counselor who understands all of the implications of these factors and how they will have an impact on your unique borrowing needs. Only an accredited mortgage broker is able to clarify these interest rate (as well as other) issues and help you see what your strategy should be. (hypotheque) Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage
Related Tags: mortgage, home loan, mortgage rates, hypotheque, taux hypothecaire, prêt hypothécaire
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