If you don’t have much working understanding of Canadian real estate (mortgage lending in particular), the concept of mortgage rates might seem baffling, even nonsensical. For example, how does a local mortgage broker in North York come up with these rates? From a layman’s perspective, these rates might as well have emerged out of thin air; they don’t make sense unless you take the time to understand them.
Once you understand the slew of factors that cause mortgage rates in Canada to increase or decrease, you’ll become a savvier home buyer. You’ll be able to formulate the best plan of action to safeguard your finances and your future as you take those first steps toward becoming a homeowner.
The Bond Market
The Canadian bond market primarily impacts how chartered banks issue fixed-rate mortgages and determine mortgage rates. To briefly summarize the role of bonds in the real estate market:
Bonds provide loss security to banks and their mortgage departments. They facilitate no risk to the lender, guarantee a minimal profit, and do not cost the bank anything.
Bond rates are determined by calculating the interest collected by the bank as well as any earnings that are being forecast from the earnings on bond investments. Basically, when a bond has a higher value, interest rates tend to be lower. When the value on the bond is lower, interest rates increase.
The Bank of Canada
Where variable-rate mortgages are concerned, the Bank of Canada’s key interest rate heavily influences mortgage rates. The banks calculate their prime rates based off of the key interest rate posed by the Bank of Canada itself. This rate tends to increase to combat the effects of inflation. When rates determined by the Bank of Canada increase, so do mortgage rates.
One term to look out for here is “overnight rate.” The overnight rate, which is another way of saying “key interest rate,” refers to how banks lend one-day funds between themselves. It is also sometimes referred to as the “key policy rate.”
Keeping up-to-date on the circumstances of both the bond market and the Bank of Canada will help you to best understand the real estate market and how it relates to your situation. Based off of the information you can obtain this way, you will be able to determine if now is a good time to buy.
Mortgage rates in Canada, for both fixed-rate and variable-rate mortgages, are constantly changing in response to the country’s economy. If you want to find the best window to make this enormous financial step forward in your life, pay attention to the variables outlined above and learn what that means for your specific situation.