Why do Mortgage Rates Change?

Fixed mortgage rates change in response to a change in the bond market:

We hear in the news “rates are going up/ rates are going down”, where do Canadian fixed mortgage rates really come from?

Good Question, contrary to popular belief, when the Bank of Canada meets and increases or decreases the prime lending rate this does not have a direct effect on fixed rates, rather only on variable rates.

So what affects Canadian fixed mortgage rates? – the Canadian bond market. As bonds move up and down so do Canadian fixed mortgage rates. From the discounted mortgage brokerage channels, lenders typically aim for a spread above the bond (their gross profit margin) of 1.4% to 1.8%.

For example: a bond rate of 2.15% should yield a five year fixed rate in the 3.65% – 3.95% range.

How can you benefit from this knowledge?

By know and tracking the bond rate we should be able to predict upcoming Canadian fixed mortgage rate changes and in turn capitalize through either examining locking in our variable rate mortgages or securing a pre-approval at a low rate for a future purchase.

Do banks always follow this rule when determining Canadian fixed mortgage rate changes?

In principal the lenders follow this, the profit margins that lenders will aim for is typically 1.4%, however in a competitive spring market we have seen lender spreads as low as 1.2% and at other times of the year the spread has been over 2%.

There are times when we have a conversation with our clients that goes along the lines of “Your new fixed rate mortgage should be lower based upon the bond rates however right now all of the lenders are taking a larger profit, if this changes prior to funding we will make sure you receive the benefit of the decrease but there is no guaranty that lenders will drop the rates in spite of the bond decreasing.”

Variable mortgage rates fluctuate in response to changes in the bank of Canada prime rate:

The bank of Canada meets eight times per year, two months on and one month off, at these meetings there can be an announcement of a change in the prime rate.

Why would the prime change?

Prime rate is one of the easiest ways for the Bank of Canada to stimulate the economy (lowering rates) or slow down the economy (raising rates). As well, it is also a great way for the government to raise and lower the value of the Canadian dollar relative to the American. An increase in prime will often result in an increase in the value of the Canadian dollar. With this in mind, the general fiscal policy of the government typically calls for a lower Canadian dollar. The Canadian dollar at $0.75 of the USD isn’t great when we travel to Disneyland however it is great for the manufacturing sector and Canadian exports as Canadian goods are relatively less expensive for similar quality and are therefore much more desirable. This stimulation to the exporting and manufacturing sector in turn is generally much better for the overall Canadian economy.

In short we are often able to predict future potential changes for our variable rate clients in light of the Canadian and American economies along with economic outlooks and reports from the Bank of Canada.

We are here to help and would be happy to discuss your mortgage options with you.  Please feel free to contact us via phone, online connect form, or by applying online.