Mortgage rates are frequently making headlines these days, especially now as they start to fall.

But do you know what factors are influencing the mortgage rates you read about? What about the difference between fixed-rate mortgages and variable-rate mortgages?

While mortgage rates can seem complex, knowing what influences them can help you make better decisions. Here’s a straightforward guide to help you better grasp the factors behind those rate moves.

Variable mortgage rates and the Bank of Canada

Variable mortgage rates are directly linked to the Bank of Canada’s overnight rate. This is the interest rate at which major banks lend money to each other quite literally overnight. Here’s how it works:

1. Overnight rate: The Bank of Canada adjusts the overnight rate to control inflation and stabilize the economy. You've likely seen the much-hyped news coverage about these decisions eight times a year. 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.
2. 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, and if the overnight rate is cut, your mortgage rate will likely decrease.

Variable rates fluctuate based on the Bank of Canada’s policy rate, which is 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 stay 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 since it correlates closely to the popular 5-year fixed mortgage term. Here’s the connection:

1. 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.
2. 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.
3. Fixed rate stability: 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. This can provide peace of mind and easier financial planning.

Choosing the right mortgage can be daunting, especially with the complexities of economic conditions and rate fluctuations. But the good news is professional help and advice is just a phone call or a click away. 

Contact me for a list of recommended mortgage professionals to help you navigate the world of mortgages!

Source/Original Article: Katy Mackenzie, Mortgage Professional | (604) 612-6970 | katy@mackenziemortgage.com