If you are in the market to buy a home, simply knowing the current Bank of Canada mortgage rate is not enough. Calgary mortgage rates fluctuate, and those without an understanding of how rates are determined can find themselves unprepared for changes. Whether you are just thinking about buying a home or you have already taken steps toward pre-approval, at Mortgages by Candice, we believe in taking the mystery and the stress out of the mortgage process. It’s our goal to help you realize your financial dreams, and understanding how your mortgage rates are determined is one important step down that road.
After several of Canada’s major banks raised mortgage rates in the spring, and then the floods hit in early summer, many people have been justifiably nervous about how all factors would impact the outlook for future mortgage rates. The market has been relatively stable, and rates have been low long enough that many people felt like increases were imminent. Of course, all financial dealings are driven by supply and demand, but there are other economic factors at work as well.
Bond Yields Drive the Market
As we told you in July, the rate increases Scotia Bank, TD, and RBC announced in June were the result of climbing interest rates on government bonds. To understand how Calgary mortgage rates are determined, you have to understand the impact of bond yields. Bonds are among the safest bets for investors. They guarantee repayment after the term ends at a set rate (referred to as “the coupon”). In a strong economy, investors turn to higher risk—and higher return—investments, so bond prices decrease and yields go up. When the market is weaker, there is more demand for “safe” money, so bond prices increase and yields go down.
Mortgages are funded through stocks or bonds (called capital issues) and the bond market. A mortgage’s interest rate is dependent on the yield the bank gives bond investors. When the market demands a higher yield, mortgages are issued at a higher interest rate. Typically, the cost for the bank to borrow in order to fund mortgages is the same or very close to the percentage yield paid to investors in the bonds.
Essentially, the cost of a fixed mortgage for a borrower is based on the cost of the capital and administration costs, the risk premium (in case the borrower defaults), and the bank’s desired profit. If you want to try to predict whether mortgage rates are likely to go up or down, look at the bond market. With today’s relatively stable bond market, change is less likely. Click here to see today’s Calgary mortgage rates, and learn how to lock into your lowest mortgage rate now.
Fixed or Variable?
When you speak with your Calgary mortgage broker, one of the options you will discuss will be whether you would prefer a fixed or variable rate mortgage. These types of mortgages are designed to suit homebuyers with different financial needs. The determining factors in establishing fixed and variable mortgage rates are different as well.
With fixed mortgage rates, the interest rate remains the same throughout the term of the mortgage, and they are very similar the Canadian government bond yields for the same term. This is because a bank’s cost for funds is based directly on the cost of the bonds. The difference between bond yields and mortgage rates is the revenue banks require in order to lend the funds on the Canadian mortgage market.
Variable mortgage rates fluctuate according to the prime lending rate set by the Bank of Canada. To curb inflation, the bank will raise the prime rate, which will then lead to an increase in variable mortgage rates. This potential for change means those with variable rate mortgages should watch the Bank of Canada for any changes it makes to the prime rate as a signal for what will soon be happening to their mortgage rates.
What Does This Mean For the Future?
Mortgage rates remain at near historic lows. As hard as it might be to imagine, just over twenty years ago, the rate for a five-year mortgage was about 18 per cent! Today, inflation remains low, and the economy has improved over the last several years. Both fixed and variable rates will remain stable for the near future.
Whether it is the impact of the bond market or the prime lending rate, mortgages are heavily affected by supply and demand. If you are considering buying a home, now is a great time to meet with a Calgary mortgage broker to discuss your options. A broker can supply you with rates well below those offered by banks. And you get the benefit of personalized service and the expert advice of a broker. If you have any questions, please contact us today.