There are many factors that influence the overall health of the Canadian economy; unemployment, inflation, consumer confidence and the housing market, just to name a small few.
Factors affecting the Fixed Mortgage Rates
One of the main factors that affects fixed mortgage rates is the Government of Canada Bond Yields. Fixed mortgage rates normally move in alignment with the Government of Canada Bond Yields.
Bond Prices and Bond Yields
There is a negative relationship between bond yields and the price of bonds. Meaning that when bond prices increase, the bond yields decrease and when bond prices decreases, the bond yield increases. Bonds are historically safer than stocks, especially Government issued bonds and due to this bond prices for Government bonds decrease when the market is booming and increase when the market is dipping
Bond Yields and fixed rates generally have a positive relationship. Meaning that when bond yields increase, fixed rate also increases.
Stock Market
When the Stock Market is booming, investors are more likely to make a higher return on investment equities than investing in bonds. This means that the demand for bonds decreases and as such the bond price decreases and the bond yield increases and this will lead to an increase in the fixed rate. On the other hand, when the stock market is dipping, and stocks do not look as enticing, investors are more likely to invest in safer investments, such as bonds. As such the fixed rate will likely decrease due to the price of bonds increasing, the demand for bonds increasing and the yield of bonds decreases.
Factors affecting the Variable Mortgage Rates
The bank of Canada is responsible for changes to variable mortgage rates because they determine the target overnight lending rate.
Variable Rates and Overnight Rate
The overnight rate changes the cost of lending/borrowing short term funds and therefore influences the prime rate. Meaning when the prime rate goes up, so will your variable rate and monthly payments, as prime rates are linked to variable mortgage rates.
Prime -/+
Variable mortgage rates are normally advertised as Prime plus or minus (insert rate here), which means the interest you pay is directly related to the Prime Rate and will fluctuate whenever these change. Let’s say the current overnight rate is 0.5% and the major banks prime rate is 2%, and at that time the variable mortgage rate is – 0.50% (thus 1.5%). If the Bank of Canada increases the overnight rate from 0.5% to 0.75% (an increase of 0.25%), the banks will likely follow suit and increase their prime rate by the same 0.25% to 2.25%. Your variable mortgage rate will thus also change due to this increase in the prime rate, making your new variable mortgage rate 2.75% – 0.50% = 1.75%.
