Mechanics Behind Mortgage Rates.

As I mentioned in my last blog, there are several factors that influence mortgage rates in Canada.  Of course the Bank of Canada which keeps an eye on inflation - sets a "standard" for the lenders - as a base line, taking in todays economic influences on a world scale and how it affects us all at home.  Never before as important as in todays economic climate.

But what is the connection - between the Bank of Canada rate and a mortgage rate?  How are these rates set and what or who - makes them go up or down.

Firstly, mortgage rates in Canada are going to hinge on whatever is happening with the Bank of Canada - our nations "central bank".  This isn't a commercial bank and does not offer banking services to the public.  They are a federal organization responsible for Canada's monetary policy, our actual money and our financial system.  And yes - a little bragging never hurts - still rated number one in the world.  What does that have to do with mortgage rates ?

The Bank of Canada sets what is called the "overnight rate" - which is the rate that banks charge each other to cover their short-term daily transactions.  If the rate goes up - it means the central bank believes that the economy is growing more quickly than it should.  In other words, a small increase in the rate can help slow inflation.  The best economic growth is a moderate, low-inflation growth.  Things start to move too quickly - wages and prices start to climb rapidly - and the Bank of Canada will nudge the rate higher to slow things down.  On the opposite front - things start to slow - people stop spending - the rate comes down a bit to encourage us to keep the economy ticking, buying big ticket items - homes, cars, appliances - to keep the factories, suppliers, stores, truckers, etc in business.

So the overnight rate is set but its the chartered banks you do business with that set the "prime lending rate" - the rate they offer their best customers.  They must of course base their decisions on the overnight rate because its that rate that influences their own borrowing.  If the central bank sends a message with a rate change - thats a clear signal to the chartered banks to follow.  This of course runs down the line to mortgage rates.  If you have a "variable" mortage rate or other "floating" rate loans (lines of credit) then your rate will move up and down with the prime lending rate.  With no immediate magic wand being waved to fix our economic woes - national or global - many buyers are opting for a variable mortgage with an option to lock into a certain rate -  if things pick up rapidly.  Lenders will offer variable rate mortgages - you've heard this before - "prime minus a certain percentage".

If you like total control then a fixed rate mortage is the way to go.  A five year term will have you being able to budget without concern of interest rates rising or falling for that five year period.  Banks use Government of Canada bonds to raise money for fixed-term mortgages.  In a bond market, interest rates can fluctuate more often - since they are subject to the changing moods of investors and traders (hello Bernie Madoff). As a result - watch the bond market for clues as to where the mortgage rates will go next.

Being at "emergency" lows and with the right information - you can find incredible variable rates and offerings from your lender - while still maintaining "control" if a rise begins to show on the horizon.  Don't panic even if you sense something in the wind - this recovery is going to be a long process.  Take advantage of it.

Contact me anytime for a chat on the Vancouver real estate market and sound advice on what - if anything - you can capitalize on - either by downsizing (sale) or timing of a purchase. 

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