Why do Canadian Fixed Mortgage Rates change?

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 bond market.

The source of Canadian fixed mortgage rate changes:

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 profit margin) of 1.4% to 1.6%.

For example, a bond rate of 2.15% should yield a five year fixed rate in the 3.65% – 3.75% range.

Well, this is interesting but why should I care?

By know and tracking the bond rate on sites such as TMXmoney 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 however the profit margins that lenders will aim for is principally 1.4% however in a competitive spring market we have seen lender spreads as low as 1% and at other times of the year the spread has been over 2%.  There are times when I have a conversation with my 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 I 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.”

Please feel free to contact me if you are interested discussing further why Canadian fixed mortgage rates change and if you have any questions regarding locking in your current variable rate mortgage or obtaining a mortgage pre-approval.