There has been much uncertainty in the world lately. Global pandemic, supply chain issues, energy crisis, war, hurricanes, inflation, etc. The list goes on and on these days. But we see enough about these topics everyday in the news so I'd like to break down mortgage interest rates. How are they determined and who determines them.

Variable Rates

First we'll start with variable rates. Lenders will offer a variable interest rate as a discount off of Prime. For example, Prime -0.9%. Prime rate is a sort of benchmark rate that banks and institutions use to determine interest rates for various products. The Prime rate is directly influenced by the Bank of Canada's (BOC) policy interest rate. When the BOC raises the policy interest rate, it becomes more expensive for the banks to borrow money, therefore they raise the Prime rate to cover the added expenses. Currently the BOC policy rate is 3.25% and Prime rate is 5.45%. The BOC can raise or lower the policy rate as a tool to help control inflation. Banks can set their own Prime rate, but it is generally the same across the board and directly changed by BOC's actions.

Why are Rates Rising?

Currently, the BOC is raising the policy interest rate to tame out of control inflation. Prices have been soaring upwards throughout this year with Year over Year inflation peaking at 8.1% in June 2022. By increasing rates, it becomes more expensive to borrow money and people will be more inclined to reduce spending and borrowing. It appears that we are starting to see the peak of inflation with July and August numbers coming in at 7.6% and 7% respectively. Hopefully this downward trend continues and we can get back to the target inflation rate of 2% before too long.

Fixed Rates

Fixed rates are influenced by Canada bond yields. A bond is a loan between and investor and borrower with a fixed income structure. In this case we are talking about Canada government bonds. They are used as a tool to drum up investments to fund projects and operations. They have a set price, maturity, and payment structure. Bonds can be sold before maturity date and although the fixed payments remain the same, the value can fluctuate quite frequently. As the price changes, so does the yield. when a bond's price falls, its yield increases. When a bond's price increases, its yield decreases. Ok, so why is this important for fixed mortgage rates? Fixed mortgage rates move with and stay higher than bond yields because investing in a mortgage is riskier than investing in bonds. There is more risk of default or prepayment with a mortgage. Mortgage interest rates stay higher than bond yields for this reason. If you are interested in where fixed rates might be heading, watch the Canada 5 year bond yields.

Where do we go from here?

Mortgage rates can be stable for longer periods of time, or extremely volatile like we are currently experiencing. It is hard to predict where they will go from here with all of the uncertainty currently going on. The main factor will be inflation. Until inflation comes back down to or near target of 2%, there will likely be more increases from the Bank of Canada. Once things cool off and inflation is no longer a threat, rates should creep back down to neutral territory where they are neither stimulating or restraining the economy.

Sam Ahier - Equity Care Mortgages 519-212-4480 Email: sam@samahier.com