How are Mortgage Rates Calculated?

Rising Mortgage Rates

You may have heard that mortgage rates are on the rise. This impacts new home buyers, homeowners with mortgage renewals, and those who have a variable-rate mortgage. Understanding how lenders set their variable and fixed mortgage rates is important when shopping for a new home or renewing your existing mortgage.

Eight times per year, the Bank of Canada makes a scheduled announcement about their benchmark lending rate based on data they collected on the current state of the Canadian economy. Any change to this rate indicates a possible change to variable-rate mortgages. This is because the rate set by the Bank of Canada will directly affect the prime rate offered by lenders. Homeowners with this type of mortgage will notice their rate has increased a couple of times this year.

The government bond market is what influences fixed rates. Lenders rely on bond yields to finance the expenses of holding these mortgages. Bond interest rates (bond yields) move up or down more frequently than the benchmark rate because bonds are far more sensitive to market fluctuations. Typically, lenders will move fixed mortgage rates when traders believe the Bank of Canada is about to increase, or reduce, bond interest rates. Anyone who is buying a new home or renewing an existing mortgage will notice that fixed rates have been increasing.

While its true mortgage rates have been climbing this year, current rates are still below what they’ve been in recent decades. In the 2000s, the average mortgage rate was 6.27%. In the 1990s, the average rate was 8.12%.

Having a basic understanding of interest rates is important when shopping for a new home. Even though mortgage rates are rising, they’re still worth taking advantage of today. You will want to do so sooner rather than later because experts’ project rates will continue to increase throughout this year. Start a mortgage pre-approval as soon as possible to secure today’s rates for 120 days. Delaying for a few months could cost you thousands of dollars in interest over the term of your mortgage.

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