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Why Do Mortgage Rates Change?

Why Do Mortgage Rates Change?

posted in Mortgage News

Influencing the health of the economy are many factors, from unemployment and inflation, to consumer confidence and the housing market, and any number of these, when combined, can also influence fixed and variable mortgage rates.

Factors that can have an impact upon fixed mortgage rates:

  • Government of Canada bond yields - perhaps the most significant factor that affects fixed rate mortgages is the Government of Canada bond yields; mortgages with fixed rates generally move in alignment with government bond yields of the same term.

  • Bond prices and bond yields (negative relationship) – bond prices have a negative relationship with bond yields, meaning that when bond prices go up, bond yields go down, and when bond prices decrease, bond yields go up. Usually considered to be a safer investment than stocks, Government bonds in particular typically go down when the economy is thriving, and then decrease when the market dips again.

  • Bond yields and fixed rates (positive relationship) – Commonly, fixed rates have a positive relationship with bond yields and go up and down along with them; bond yields increase, fixed rates increase and follow the same pattern when bond yields decrease.

  • When the stock market is doing well – anyone investing in equities (ie the stock market), is much more likely to make a higher return on their investment when the stock market is doing well, in comparison to investing in bonds, driving demand for bonds. This then means that the price of bonds goes down, and bond yield subsequently increases. When this happens, fixed rates are likely to increase, too.

  • When the stock market isn’t doing well – when stocks are not such a healthy prospect, on the other hand, investors are far more likely to make safer investments, such as bonds, and their demand subsequently rises, while their yield decreases. As a direct result of this, fixed rates will likely go down.

Factors that can have an impact upon variable mortgage rates:

  • The Bank of Canada – determining the target overnight lending rate, the Bank of Canada is responsible for changes to variable rates.

  • The overnight rate – Changing the cost of lending and borrowing short-term funds, and influencing the Prime Rate as a result, the overnight rate is linked to variable mortgage rates and when the prime rate goes up, so do variable mortgage rates and monthly payments.

  • Prime +/- - advertised as prime plus or minus X%, variable mortgage rates mean that the interest rate you pay, is directly linked to the prime rate and will go up and down as and when this changes.

While there are many factors that can affect a mortgage rate, when you work with a qualified and professional mortgage broker, they will help you to navigate the murky economical waters to select a rate that is most likely to work well for you given the current situation, while taking any predictable market fluctuations into account.


Mortgage News

22 dSep, 2020

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