Figuring out what type of mortgage you want and what you can afford can be confusing, which is why I’m happy to offer a mortgage calculator on this website. With changing mortgage rates and complex-sounding terms, the process can seem much more complicated than it really is. Understanding how banks determine mortgage rates is a helpful step to de-mystifying real estate and the home-buying experience.
The simplest way to think of a mortgage rate is to compare it to the interest rate you’d pay on any loan. But it’s a little bit more involved than that. And mortgage rates are not exactly the same thing as the Bank of Canada’s monthly interest rate, although that’s a common misconception. Ultimately, variable and fixed mortgage rates are both set differently, so it’s helpful to understand the distinction.
Variable rates are indeed dependent on the Bank of Canada, namely on its key interest rate. This key interest rate in turn affects the Prime rate, which is what commercial banks charge for one-day/overnight loans they make to each other. And the Prime rate in turn affects all sorts of consumer loan and mortgage rates. Falling key interest rates can therefore decrease your mortgage payments. And note that the Bank of Canada will raise the key interest rate if it believes it needs to combat inflation.
Fixed mortgage rates are a little different, because they are impacted by Canadian government bond yields. Remember that bonds are traded daily, like stocks, so supply and demand affects their value (as does inflation, liquidity and the return on other financial assets). The important thing to remember is that when the stock market is doing well, bonds (considered safety investments) are less tempting so their price drops and their yield increases (as would your mortgage rate). Conversely, typically, when during rocky times in the economy, people prefer bonds, so their price increases, and therefore their yield decreases, and therefore mortgage rates do, too.
Of course there is more to what your personal rate will be than official mortgage rates (and you can see current rates here). Things like your credit score and your down payment amount can also affect your mortgage rate (and please stay tuned for coming posts on how to get the best possible rate). I’m happy to point you to a mortgage professional who can help you secure the best rate possible. I also have an Accredited Buyer Representative designation, meaning I am committed to advocating for my clients and helping them get the best possible price and terms for their purchase. Please use my mortgage calculator, but please also remember that there are lots of factors we can use to get you into your dream home.