Understanding What Impacts Mortgage Rates

Mortgage rates are often in the headlines, especially now as they start to fall. But what factors influence these rates, and what's the difference between fixed-rate and variable-rate mortgages?

While mortgage rates can seem complex, understanding what influences them can help you make better decisions. Here’s a straightforward guide to the factors behind those rate changes.

Variable Mortgage Rates and the Bank of Canada

Variable mortgage rates are directly tied to the Bank of Canada’s overnight rate, the interest rate at which major banks lend money to each other overnight. Here’s how it works:

Overnight Rate: The Bank of Canada adjusts this rate to control inflation and stabilize the economy. When the overnight rate rises, borrowing costs for banks increase, leading to higher prime rates. When the overnight rate falls, the prime rate follows.
Prime Rate: This rate serves as the benchmark for variable mortgage rates and other variable-rate products like lines of credit. An increase in the overnight rate will likely increase your variable mortgage rate, while a decrease will likely lower it.

Variable rates fluctuate based on the Bank of Canada’s policy rate, influenced by their efforts to manage economic conditions. The remaining 2024 Bank of Canada announcement dates are July 24, September 4, October 23, and December 11.

Fixed Mortgage Rates and Bond Yields

Unlike variable mortgage rates, fixed rates stay the same until the end of your mortgage term and are not influenced by the Bank of Canada’s policy changes. Instead, these rates are determined by government bond yields, especially the 5-year government bond yield, which closely correlates with the popular 5-year fixed mortgage term. Here’s the connection:

Bond Yields: Banks use government bonds to hedge against the risk of fixed-rate mortgages. The yield on these bonds reflects market expectations of future interest rates and economic conditions. Higher yields indicate higher future rates and inflation, leading to higher fixed mortgage rates.
Economic Factors: Bond yields fluctuate based on economic data, inflation expectations, and global events. Strong economic growth and rising inflation lead to higher yields and fixed rates, while economic downturns result in lower yields and rates.

One key benefit of a fixed-rate mortgage is stability. Choosing a 5-year fixed rate means your interest rate remains the same throughout the term, regardless of market rate changes, providing peace of mind and easier financial planning.

Navigating Your Mortgage Choices

Choosing the right mortgage can be daunting, especially with the complexities of economic conditions and rate fluctuations. But professional help is just a phone call or click away. Reach out to us today to discuss!