In order to choose the right mortgage strategy that will save you the most money, you have to understand the factors that interest interest rates increases and decreases - taux hypothecaire.
This is a complex topic and this is the most rudimentary explanation. If you visited a library or searched on the internet, you would find literally thousands of entries on the topic of how interest rates are determined. We will look at the Bank of Canada’s fiscal policy and the fixed income market (hypotheque).
A borrower may think that it is the bank that is controlling what his interest rate on his home loan will be. The bank is really only reacting to the influences in the economic arena that determine mortgage interest rates:
-Variable rates are determined by the prime rate - pret hypothecaire. -Fixed rates are determined by the bond market.
The Bank of Canada fixes a base rate that determines the prime rate that the major Canadian banks will set. The prime rate is then used by these banks and other mortgage lenders to determine variable mortgage rates.
If you only look at the variable rate you are given on the day your rate is being fixed, you are not seeing the whole cost of your home loan. For example, if you secure a 4.75% variable rate mortgage when the prime rate is 5.5%, you are really obtaining a “prime less .75%” rate. But if the fixed rate is 5.4% for the same period, you may feel you are getting a bargain. However, be conscious of the fact that if the prime rate changes (which it can eight times each year) your variable rate will change. If it goes to 6%, your rate will go to 5.25%. (hypotheque)
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 Bank of Canada uses the prime rate to control growth and inflation. The governors of the Bank of Canada will watch the inflation rate, as measured by the CPI (Consumer Price Index), and the GDP (Gross Domestic Product). (hypotheque)
Strong increases in the CPI (2% or above) mean inflation and the Bank will tend to increase rates to forestall inflationary tendencies. GDP measures the country’s economic activity and is also a factor in inflation, so it is a factor that the Bank of Canada keeps an eye on to determine rates.
If the GDP and the CPI have slow rates of growth, the Bank of Canada will probably lower rates to encourage investment and purchases and conversely if they are growing strongly, they will increase rates. (hypotheque)
Fixed rates are set by each lender and are also determined by many factors, the most important of which are the lender’s portfolio earnings and its cost of funds.
Most home loan customers now realize that banks and other financial institutions buy and sell mortgages fairly regularly to investors in the secondary market. They do this to “balance” their portfolios of mortgages.
The investors the banks sell these mortgages to are also investors in the bond market, so the secondary mortgage market has to compete with the bond market. If the rates in the bond market go up, the banks will have to offer increased rates on their mortgage portfolios by increasing the rates on the mortgages they write. When the rates on the bond markets come down, the fixed mortgage rates can come down to be in line with them. (pret hypothecaire)
Now you see that the interest rate you will pay on your mortgage is determined by decisions made by banks, lenders and investors in the bond markets, the Bank of Canada, the CPI and the GDP. These players all join in a complex structure that takes a lot of study by experts - pret hypothecaire.
What can an average consumer do? The best solution is to work closely with a qualified mortgage consultant who understands all of the implications of these factors and how they will have an impact on your unique borrowing needs. Only an accredited mortgage broker is able to explain these interest rate (as well as other) issues and determine what your strategy should be. (pret hypothecaire)
Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage