What Factors Can Impact Your Mortgage Rate?
posted in Mortgage News
As one of the most significant purchases most of us will make in our lifetime, a mortgage is a big deal, and as such, it can help to save money on it wherever, and whenever you can. Even the smallest of changes in an interest rate can make a big difference to the amount you have to pay on your mortgage, making understanding the factors that can impact these rates, very important.
Let’s look a little more closely at what factors can impact mortgage rates:
Economic factors, both in Canada and globally:
Whether at home here in Canada, or elsewhere in the world, the money coming from depositors and investors that banks lend out, means the cost of funding is predominantly driven by the interest rates in these places, and these rates can vary hugely.
Strong economic growth fueling demand for money:
Higher interest rates are typically a result of strong economic growth, while lower rates are consistent with economic growth being weaker. To explain this further: strong economies make businesses want to borrow money from their investors to expand their companies, meaning that a mortgage provider must pay a higher rate of interest to encourage investors to lend it to them. The opposite occurs when an economy is weak.
Global economy as a whole:
With a lot of banks in Canada borrowing money from other countries such as the US, it pays to remember that the financial markets of the world are all connected, and that rates of interest in Canada typically respond to what might be happening elsewhere in the world.
Influences from The Bank of Canada:
Changes to The Bank of Canada’s policy interest rate can have a significant impact upon mortgage interest rates, and when the economy is strong, they may elevate the rate to prevent inflation from soaring above their target. In much the same way, when the economy is weak, they might choose to lower their policy rate to stop inflation from dipping below the target.
Where short-term interest rates are concerned, changes made by The Bank of Canada to their policy interest rate can lead to similar changes, including the prime rate; used by banks to help provide a basis for the price of variable-rate mortgages.
A change to policy rates can also have an impact upon long-term interest rates, particularly if the change is not expected to be long-lasting.
Your particular mortgage and its characteristics:
Some of the features you choose for your mortgage, along with your past credit history, can influence how much of a risk, lenders deem you to be; the higher the risk, the higher the interest rate.
Risk of non-repayment:
Lenders are primarily most concerned as to whether you’ll be able to repay the loan, and a high credit score can help strengthen your case and mean that you pay a lower rate of interest than someone else with a lower score.
Interest rate risk:
While typically renegotiated every five years, Canadian mortgage loans can be renegotiated as often as every six months, and the more often this is done, the higher the risk of the rate being different to the previous one.
Risk associated with prepayment:
Lenders are unable to profit as much from the funds they raised for your mortgage – especially if interest rates have fallen since it commenced - if you repay it early, something that is known as prepayment risk.
So, what should you take away from all of this? Do your research and shop around to make sure you’re getting the best rates possible! Or instead, have a professional mortgage expert do it for you.