Understanding What Impacts Mortgage Rates
Mortgage rates have been a hot topic lately, especially as they start to fall. But do you know what factors influence these rates? And do you understand the difference between fixed-rate and variable-rate mortgages?
While mortgage rates can seem complex, understanding what influences them can help you make better decisions. Here’s a straightforward guide to help you grasp the factors behind those rate moves.
The Role of the Bank of Canada in Variable Mortgage Rates
Variable mortgage rates are tied directly to the Bank of Canada’s overnight rate, which is the interest rate at which major banks lend money to each other overnight. Here’s how it impacts you:
- Overnight Rate: Adjusted by the Bank of Canada to control inflation and stabilize the economy, the overnight rate influences borrowing costs for banks. When the Bank raises the rate, banks increase their prime rates. Conversely, when it lowers the rate, the prime rate drops.
- Prime Rate: This serves as the benchmark for variable mortgage rates and other variable-rate products like lines of credit. An increase in the overnight rate typically raises your variable mortgage rate, while a decrease will likely lower it.
Variable rates change with the Bank of Canada’s policy rate, influenced by economic management efforts. The remaining 2024 Bank of Canada announcement dates are: July 24, September 4, October 23, and December 11.
Fixed Mortgage Rates and Their Connection to Bond Yields
Fixed mortgage rates remain constant for the duration of your mortgage term and are not affected by changes in the Bank of Canada’s policy. Instead, they are influenced by government bond yields, particularly the 5-year government bond yield. Here’s the connection:
- Bond Yields: Banks use government bonds to mitigate the risk of fixed-rate mortgages. Bond yields reflect market expectations of future interest rates and economic conditions. Higher yields suggest higher future rates and inflation, leading to higher fixed mortgage rates.
- Economic Factors: Bond yields fluctuate based on economic data, inflation expectations, and global events. Strong economic growth and rising inflation drive yields and fixed rates higher, while economic downturns lead to lower yields and rates.
- Fixed Rate Stability: A key benefit of a fixed-rate mortgage is its stability. With a 5-year fixed rate, your interest rate remains unchanged regardless of market movements, offering peace of mind and simplified financial planning.
Guiding You Through Mortgage Choices
Choosing the right mortgage can be complex, but professional guidance is just a phone call or click away.
Contact me today to leverage my expertise and find the best mortgage solution tailored to your unique needs and financial goals.
Cindy MacFarland
Mortgage Broker
(506) 647-1164
cindy.macfarland@mortgagegrp.com