Canadian Mortgage Rates: How Are They Determined?

Canadian mortgage rates are constantly fluctuating, so what makes them move up and down? And how are they even set in the first place?

As you probably know, mortgage rates depend on the economy, but it’s more specific than that.

The factors that influence mortgage rates also differ between variable mortgages and fixed mortgages.

Knowing how Canadian mortgage rates are determined can be extremely valuable when you apply for a mortgage. If you know how the rates are set you’ll likely have a good idea whether they’ll be going up or down in the future. This information can influence the type of mortgage you’ll apply for and could potentially save you money.


Variable Mortgage Rates

Variable mortgage rates are determined based on the lender’s prime rate, which is mainly influenced by the Bank of Canada’s key interest rate. The key interest rate is the Bank of Canada’s way of letting commercial banks know whether they should raise or lower their interest rate.

So, as the key interest rate rises and falls so to do mortgage rates. The Bank of Canada sets rates eight times a year: in late January, early March, mid-April, late May, mid July, early September, mid-October and early December.


Fixed Mortgage Rates

Fixed mortgage rates are primarily determined by the yield on Canadian government bonds. When bond yields go up so do fixed mortgage rates, and vice versa.

It’s important to note that changes in bond yields don’t always immediately affect fixed mortgage rates. When bond yields go down banks generally take their time adjusting their rate. However, when yields increase banks are usually quicker to react.


What Causes Canadian Mortgage Rates to Move Up and Down?

Now we know how Canadian mortgage rates are determined, but what factors influence whether they move up or down? Essentially, when the economy is good mortgage rates go up, and when the economy is bad interest rates fall. If we delve a little deeper we can see exactly why this happens.

As mentioned before, variable mortgage rates are affected when the key interest rate is changed. The Bank of Canada increases the key interest rate as the economy starts to grow. A growing economy is a good thing, but if it grows too rapidly that can lead to rising prices for good and services. This is known as inflation. By increasing the key interest rate the Bank of Canada is able to to slow the growth of the economy down to prevent this from happening.

Conversely, the key interest rate is decreased when the economy is in a downturn. By lowering interest rates it encourages businesses and consumers to borrow, which in turn spurs economic growth.

Fixed mortgage rates move up and down depending on bond yields. When the economy is good people are more inclined to invest in stocks. Because of this, bond yields are increased to make them more attractive to investors. When bond yields increase so do fixed mortgage rates. When the economy is struggling investors tend move their money to safer investments, such as government bonds. Because during these times there is more demand for bonds, yields are decreased. This causes fixed mortgage rates to fall as well.


How You Can Use This Information to Your Advantage

Once you know how Canadian mortgage rates work you should have a better idea about what they might do in the future. Before applying for a mortgage read financial projections and analyze the economy. Is it growing? Are we heading for a downturn? This should give you an idea of what mortgage rates will do in the future.

If you think rates will go up you may want to consider a fixed rate mortgage. That way you can take advantage of the lower rates now and you won’t have to worry about rates going up in the future. However, if you think rates will decrease a variable mortgage is likely a better option.

Variable mortgages also offer a fixed option which allows you to lock in your rate at any time. If you have a variable mortgage and you suspect rates will rise you may want to lock in your rate to prevent it from increasing.

Keep in mind that trying to project mortgage rates is an inexact science, so use caution and seek advice when applying this knowledge to your own mortgage. Your local mortgage broker will likely have some good thoughts about what mortgage rates will do in the future and what mortgage product is best for you.

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