Mortgage rates are one of the most important factors to consider when buying a home. These rates are impacted by factors such as economic indicators, government policies, and the overall financial health of lenders. Understanding how mortgage rates are determined can help homebuyers make informed decisions about their mortgage.
The Overnight Rate
One of the most significant determinants of mortgage rates is the overnight rate set by the Bank of Canada. The overnight rate is the interest rate at which banks lend money to each other in the overnight market. When the Bank of Canada raises the overnight rate, it becomes more expensive for banks to borrow money, and they pass on this cost to their customers by increasing their lending rates, including mortgage rates. On the other hand, when the overnight rate decreases, banks can lower their lending rates.
The Prime Rate
Another factor affecting mortgage rates is the prime rate. This is the interest rate that banks charge their most creditworthy customers. The prime rate is based on the overnight rate, and banks add a markup to set the prime rate. It is important to note that any changes in the prime rate can affect variable-rate mortgages.
Other Factors Affecting Mortgage Rates
Inflation |
The Canadian mortgage market is also influenced by economic indicators such as inflation and employment rates. Inflation is the rate at which the prices of goods and services increase over time, and it is one of the most critical indicators of overall economic health. When inflation is high, the Bank of Canada may raise interest rates to slow economic growth and prevent further inflation. As a result, this can lead to an increase in mortgage rates, making it more expensive for homebuyers to obtain a mortgage. This is exactly what we have seen happen so far in 2023. |
Employment Rates |
Employment rates are another critical economic indicator affecting the mortgage market. When employment rates are high, there is more demand for homes, and this can lead to an increase in housing prices. In turn, this can also lead to an increase in mortgage rates as lenders adjust their rates to reflect the increased demand. |
Government Policies |
Government policies also play a role in determining mortgage rates. For example, the government of Canada may introduce policies to stimulate the economy, such as lowering interest rates or increasing government spending. These policies can affect the mortgage market by influencing the Bank of Canada’s overnight or prime rate. |
Financial Health of Mortgage Lenders |
The financial health of lenders is another factor that can influence mortgage rates. Lenders are in the business of making money, which means they need to ensure their lending practices are profitable. When lenders experience financial difficulties, they may need to increase mortgage rates to offset their losses. |
In conclusion, there are a variety of factors used to determine mortgage rates. These factors include the overnight rate, prime rate, economic indicators, government policies, and the financial health of lenders. This is why it is important to shop around for the best mortgage rate, as not every lender is the same. Considering other factors such as the length of the mortgage term, the down payment, and the type of mortgage is also crucial when making a decision. By taking the time to understand how mortgage rates are determined, homebuyers can make the best choices for their financial situation and long-term goals. However, these rates don’t determine your approval. New rules in the mortgage industry were created in response to rising risk. These rules are the B-20 Lending rules.
