Wednesday, August 20, 2008

Mortgage Interest Rates

It will be difficult to choose the right mortgage strategy for your situation and that will save you the most money without understanding what influences interest rates in the first place (taux hypothecaire).

This is a very complicated subject, the topic of any number of books and business school dissertations. We’ll try to keep it basic here by discussing how the Bank of Canada’s fiscal and monetary policy along with the movements of the debt markets influence rates - pret hypothecaire.

Borrowers sometimes think that the banks make the decision to change rates. To a certain extent, this is correct, but they are doing it in reaction to other factors. In regard to mortgage rates, the variable rate mortgage is controlled by the prime rate and the fixed rate mortgage is controlled by the cost of money for the lenders. (hypotheque)

The base rate is the rate the bank of Canada charges banks, and it dictates the prime rate that the major banks of Canada will set and this in turn will determine the variable rate on mortgages.

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 is 5.4%. They do not see yet 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 really determined by the prime, so the rate we spoke about 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%. (pret hypothecaire)

The Bank of Canada sets the prime rate eight times a year at certain set intervals. Depending on a number of factors, it may raise or lower the rate, or leave it unchanged. Then the it remains at this new rate until the next interval.

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 benchmarks that BOC uses to determine the prime rate. (taux hypothecaire)

If the CPI is increasing too quickly, the Bank of Canada will want to stifle inflation by increasing the prime rate to slow things down. The GDP indicates the growth of business activity in the country and if it is growing fast it too will have an influence on inflation.

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


Fixed rates are set by each lender and are also determined by many factors, the most critical of which are the lender’s portfolio earnings and its cost of funds.

Lenders such as banks and mortgage companies buy and sell the mortgages they originate on a secondary market. They do this routinely to balance their portfolios and try to get the best return for them.

These investors have a choice between bond portfolios and mortgage portfolios, so if the rate in the bond market goes up, lenders will have to have a higher rate on their mortgages to attract these investors. How do they get the higher rate? By raising mortgage rates. If the bond rates come down, the lenders can decrease their rates. The bond market rates are deeply influenced by the rates fixed by the Bank of Canada. - taux hypothecaire

So the interest rates that the man in the street is paying on his mortgage is determined by decisions made by banks and other lenders, investors in the bond market, the Bank of Canada, the CPI and the GDP. All of this sound complicated? It is. They are all linked together. (pret hypothecaire)

The only solution to complicated issue is to work with an accredited mortgage counselor who understands these factors and can use them to help you. A good mortgage counselor will find the right mortgage strategy for you and then will find the best lender to implement that strategy for you at the best rate available - hypotheque.

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