How Mortgage Rates Are Determined in Canada

For many Canadians, their home is the biggest investment they will ever make, and their mortgage the most significant loan. When shopping for a mortgage, people generally look for ways to get low mortgage rates.

A mortgage rate doesn’t refer to the size of the mortgage loan, but rather the interest rate on your mortgage. Obviously before you buy, you’ll want to search for a low mortgage rate. There are many factors that affect mortgage rates in Canada, and a fuller understanding of these factors can be an immense help to the inexperienced buyer when applying for a mortgage.

In this article, we’ll look at a basic outline of how mortgage rates are determined in Canada, including some ways to get a low mortgage rate.

Fixed vs. Variable Rate Mortgages

There are two kinds of mortgage loans available to Canadians: fixed or variable rate mortgages. A fixed rate mortgage, as the name suggests, keeps the same interest rate and monthly payment for the duration of the term. A fixed rate mortgage is ideal for those who want more stable financial planning, and want to avoid any surprises due to sudden inflation.

A variable rate mortgage adjusts based on the lender’s prime rate, which is determined by the Bank of Canada’s overnight rate. This means the interest rates can change day to day. While obviously there is some risk involved with a variable rate mortgage, they can often save Canadian homeowners money. While the monthly payment remains the same, lower interest rates mean that more of your monthly payment goes towards your principal. While some homeowners fear sudden increases in mortgage rates, banks generally avoid this so as not to incur any backlash.


The Mortgage Market

Mortgage rates are set based on a number of factors. These factors, or steps, are referred to as the secondary mortgage market. When you are granted a mortgage loan, the following steps occur:

• Your mortgage is sold by the bank/lender to a third party investor, known as the aggregator.
  
• Your loan is combined with other loans by the aggregator to form a mortgage-backed security.
  
• The mortgage backed security is divided into shares, which are sold to other investors.
  
  

Therefore, your mortgage rates are based on what the aggregator will pay for the mortgage, but also by the worth of the mortgage-backed security and what investors are willing to pay. This creates a competitive mortgage market, with homeowners benefitting from low mortgage rates and investors benefitting from higher mortgage rates.

It can be complicated to understand everything that goes into determining mortgage rates in Canada. The best way to understand mortgage rates is to consult with one of our mortgage professionals. They understand the market thoroughly and will be able to explain how everything works, and help you find a low mortgage rate! Contact us today to schedule a consultation.

source: northwoodmortgage.com

Which Factors Affect Mortgage Rates?

When it comes to mortgage rates in Canada, there are so many factors involved it can be hard to keep track. You’re probably aware that the Bank of Canada is a top player in how mortgage rates are determined, but there’s more to it than the BoC simply deciding what rate to set at any given time. Everyone is looking for a low mortgage rate, but the factors that affect variable mortgage rates are different than those that affect their fixed rate counterparts. Below, we’ll explore the differences.

Variable mortgage rates

A variable rate mortgage is a loan where the interest rate may change during the mortgage’s term. As the borrower, your monthly payment will be same, but if there is a low interest rate, you will still be able to take advantage of it. For example, if the interest rate increases, the amount of your monthly payment that is applied to the mortgage’s principal will decrease. On the other hand, if the interest rate decreases, the amount being applied to the principal will increase.

When it comes to variable mortgage rates, these are determined by the Bank of Canada’s key interest rate (or overnight rate – the rate that banks are able to charge one another to cover their daily transactions) and how they affect the commercial banks’ prime rates. The prime rate is the lowest mortgage rate at which any bank’s best customers can borrow money. So, when the BoC increases their rate, which they do often to fight inflation, the rates on variable mortgages go up as well.

Fixed mortgage rates

A fixed rate mortgage is a loan in which the mortgage rate remains the same throughout the term. Unlike variable rate mortgages, fixed rate mortgages do not depend on the Bank of Canada to set their rates. In a fixed rate mortgage, the rates are affected by the bond market. The bond market is the commercial fiscal market where banks and other financial institutions can buy and sell securities in the form of bonds. The interest rates in the bond market move up and down more frequently than the prime rate. This is due to the sensitivity of the bond market and how it responds to market fluctuations.

Does the time of year affect mortgage rates?

There is no perfect time of year to get a low mortgage rate. The Bank of Canada sets their rates eight times yearly: late January, early March, mid-April, late May, mid-July, early September, mid-October and early December.

source: northwoodmortgage.com

Which Province Has the Lowest Mortgage Rates in Canada?

However if you go a further east, and you can secure a five-year fixed mortgage with only 2.84% interest, if you’re purchasing in British Columbia.

Alberta, Saskatchewan, and Manitoba share the same rate as Ontario, while Quebec and all of the Maritime Provinces come in within two-hundredths under 3%.

So why is this the case? It can seem slightly confusing that there is so much variation across provinces even though 5-year fixed mortgage rates are driven by 5-year government bond yields.

The short answer is that mortgage rates don’t vary as much from province-to-province as they do from lender-to-lender.

Cait Flanders of RateHub has recently offered a little insight on the matter:

“Individual lending institutions set their rates based on what their profit objectives are, how much competition they have, and what their marketing strategy is. We’ve seen how this works on a national level, when one of the big banks (BMO) launches a new low rate before the other big banks, so they can get some press and gain a little more of the market share.”

Since a lot of small lenders and credit unions only exist in certain problems, this can make all the difference. For instance, if one credit union decides to offer a lower interest rate, it’s very likely that all small lenders in that province will be pushed to offer a similar rate.

Meanwhile, if a credit union in British Columbia lowers their rate, there’s no reason for lenders in Ontario to follow suit since they aren’t competing for the same market.

Then of course, we have the issue of supply and demand. Take Toronto or Vancouver for example, both of which are experiencing a big real estate boom. This increases competition levels, and lenders are forced by the market to offer competitive rates if they want to secure business.

On the other hand, in a small town in Nova Scotia where there are very few reliable mortgage brokers, they have more freedom to decide on their own mortgage rates.

When it comes down to it, no matter where you call home, you should always shop around for the best mortgage. Establishments like Northwood Mortgage are always the best bet for the best rates as we keep our prices competitive against both the big and little companies.

Talk to one of our team members today and see the difference Northwood can make!

source: northwoodmortgage.com