Factors Affecting Mortgage Rates
As part of your education
process, it's important to
know what, exactly, affects those
mortgage rates out there. Understanding
a little bit about how the whole
mortgage system operates can translate
into increased confidence on your
part – confidence you'll
need when navigating through all
the lenders and their marketing
buzzwords.
Factor #1: The Feds
Now, you probably thought the Canadian
government had to be involved somehow,
right? In fact, the Bank of Canada
(our central bank) sets the prime
bank rate, which is the rate that
the Bank charges on short-term loans
to financial institutions. Set weekly
on Tuesdays, the rate is 25 basis
points above the average yield (interest
return) on three-month treasury
bills. These treasury bills are
auctioned weekly by the government.
What is a basis point, you ask?
Well, one hundred basis points represents
one per cent interest, so 25 basis
points is 0.25% interest.
How does this affect you? Well,
conventional lenders (including
banks, credit unions and trust companies)
adjust their prime rates and mortgage
rates using the federal bank rate
as a guide. In other words, that
central bank rate is the trendsetter
throughout the system. Multiple
factors, including the political
and economic climate, influence
the federal bank rate.
Factor #2: Monetary Supply and Demand
You may have heard before that the
general economic cycle and the so-called
real estate cycle are interrelated.
Supply and demand do come into play
here. A loose money market occurs
when there is an influx of deposits
to the lender (such as during RRSP
season), the lender has funds to
lend, and interest rates are low.
Obviously this will have a positive
impact on the real estate market,
since more people will be able to
afford financing to purchase a home.
With more buyers on the market,
real estate prices can be expected
to rise.
In a tight money market, deposits
to the lender are low (perhaps because
interest rates are low and people
feel they can get a better return
in, say, stocks), the lenders have
a shortage of money to lend out
for mortgages and
loans. They will
therefore be much more picky about
who qualifies for
loans.
Factor #3: Borrower Quality
The better the credit-worthiness
of the borrower and his or her ability
to pay back a
loan, the better the
interest rate offered to that borrower.
If you have few assets, a shaky
credit record or less stable employment,
you will pay a higher rate of interest.
Factor #4: Lender Type
The rate offered will depend on
the lender's policies and
terms, which can vary greatly from
lender to lender. Generally speaking,
conventional lenders (banks, credit
unions and trust companies) are
usually quite competitive with their
rates, although this is not always
the case. As always, shop around! |
