In order to choose the correct mortgage strategy that will save you the most money, you have to understand the factors that are behind interest rates increases and decreases - hypotheque.
The subject of interest rate movements is a complicated and convoluted one involving the monetary policy of the Bank of Canada and the analysis of the debt markets that can (and has) fill hundreds of books. Let’s try to keep it simple here - taux hypothecaire.
A borrower may think that it is his bank that controls what his interest rate on his mortgage will be. The bank is really only reacting to the factors 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 use. The prime rate is then used by these banks and other mortgage lenders to determine variable mortgage rates.
Variable Rates:
A lot of people look only at the rate they are offered at the beginning of a variable rate loan. They are thrilled that their variable rate is 4.75% when the rate on a fixed rate loan may be 5.4%. They do not realize that their rate can increase every time the Bank of Canada raises the prime rate, which can happen eight times per year. This is because variable rate mortgages are actually determined by the prime, so the rate we cited above is .75% below the prime. When the prime goes from 5.5% to 6%, the variable rate will go from 4.75% to 5.25%. (hypotheque)
The prime rate is fixed by the Bank of Canada eight times per year. The governor of the Bank of Canada, currently David Dodge, makes an announcement at these times whether the rate will increase, decrease or stay the same, and it will stay at this new rate until the next adjustment period.
The factors that influence the Bank of Canada in determining whether to raise or lower the prime rate are numerous, but the principal two are the CPI (Consumer Price Index) and the GDP (Gross Domestic Product). - hypotheque
If the CPI is increasing too quickly, the Bank of Canada will want to stifle inflation by increasing the prime rate to slow things down. The GDP shows the growth of business activity in the country and if it is growing fast it too will have an influence on inflation.
If the GDP and the CPI have slow rates of growth, the Bank of Canada will probably lower rates to encourage investment and purchases but, on the other hand if they are growing strongly, they will increase rates. (hypotheque)
Fixed Rates:
We can say that fixed rates are determined by banks and lenders, but they in turn are steered by other factors, such as their earnings on investments and their costs of funds.
Banks and other mortgage lenders buy and sell the mortgages in their portfolios in a secondary market. They try to keep their portfolios balanced and also to increase the return on them
The competition in this secondary market is the bond market. Investors who prefer to buy mortgage portfolios also like to buy bonds. They are “fixed market” investors. So the banks have to keep their rates on their mortgages in line with the bond market. If bond rates go up, the bank has to increase its mortgage rates to compete. When bond rates decrease, mortgage rates tend to decrease as well. (pret hypothecaire)
Now you understand 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. It is all linked in a complex structure that takes a lot of study by experts - pret hypothecaire.
The only way around this complicated issue is to partner with an accredited mortgage counselor who understands these factors and can use them to help you. A good mortgage counselor will search for the right mortgage strategy for you and then will find the best lender to implement that strategy for you at the most advantageous rate available - taux hypothecaire.
Gregory is an Accredited Mortgage Professional (AMP). To get more information on
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