Understanding What Impacts Mortgage Rates

Mortgage rates are often in the news, especially now as they start to decline. But what factors influence these rates? And what’s the difference between fixed-rate and variable-rate mortgages?

Mortgage rates can seem complex, but understanding what influences them can help you make better decisions. Here’s a straightforward guide to help you grasp the factors behind those rate changes.

Variable Mortgage Rates and the Bank of Canada

Variable mortgage rates are directly linked 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 works:

Overnight Rate: The Bank of Canada adjusts the overnight rate to control inflation and stabilize the economy. When the Bank raises the overnight rate, borrowing costs for banks go up, so they increase their prime rates. When the overnight rate goes down, the prime rate follows.
Prime Rate: The prime rate is the benchmark for variable mortgage rates and other variable-rate products like lines of credit. If the Bank of Canada raises the overnight rate, your variable mortgage rate will likely increase. If the overnight rate is cut, your mortgage rate will likely decrease.

Variable rates fluctuate based on the Bank of Canada’s policy rate, influenced by their efforts to manage economic conditions. The remaining 2024 Bank of Canada announcement dates are July 24, September 4, October 23, and December 11.

Fixed Mortgage Rates and Bond Yields

Unlike variable mortgage rates, fixed rates remain the same until the end of your mortgage term and are not impacted by the Bank of Canada’s policy changes. Instead, these rates are determined by government bond yields, especially the 5-year government bond yield, which correlates closely to the popular 5-year fixed mortgage term. Here’s the connection:

Bond Yields: Banks use government bonds to hedge against the risk of fixed-rate mortgages. The yield on these bonds reflects 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 change based on economic data, inflation expectations, and global events. Strong economic growth and rising inflation lead to higher yields and fixed rates, while economic downturns lead to lower yields and rates.

One of the key benefits of a fixed-rate mortgage is its stability. If you choose a 5-year fixed rate, your interest rate remains the same regardless of whether rates go up or down during that period, providing peace of mind and easier financial planning.

Navigating Your Mortgage Choices Together

Choosing the right mortgage can be daunting, especially with the complexities of economic conditions and rate fluctuations. But professional help and advice are just a phone call or click away. Reach out today for the best mortgage solution tailored to your unique needs and financial goals.