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How Are Mortgage Rates Determined?

Mortgage Rates Oakville

Looking from the outside in it’s easy to assume that mortgage rates are simply driven and adjusted by economic factors. However, there’s a lot more to it than just what the Bank of Canada does.

For starters, there are two types of mortgage rates that people get with a mortgage.

The first is a variable rate, which changes with the prime lending rate that is set by the Bank of Canada. The Bank of Canada looks at several factors to determine this rate, including considering the state of the current economy and forecasted inflation. Variable rates are easy to understand; when the prime rate goes up, so does your rate. When it goes down, yours will do the same.

The other rate type is a fixed rate. With this type of rate, your rate is locked in over the course of the mortgage term. These types of rates can be a bit more confusing to comprehend and are closely tied to bond yields of the Government for the same term.

This article by Real Estate Magazine does a good job of explaining how bond yields influence fixed rates, pointing out that they are usually determined by the price of bonds and maintain a tight relationship with them. Mortgages are funded through both capital and the bond market. Therefore, the interest rate largely depends on the yield that the bank gives bond investors.

Another major factor that has an impact on fixed mortgages is the spread that is required by banks and other financial institutions in addition to bond yields. The amount of money for trades and transactions of the loan, a risk premium and the profit margin required by the financial institution are the three pillars that directly affect the result of this spread.

The article on REM suggests that, if you’re looking for an answer on what the fixed mortgage rate may be, simply look at the bond market as that’s where you will get your most accurate estimate.

So, the next time you’re looking for a mortgage and see the posted rates, you will be equipped with some additional knowledge on how these rates are set. Rates are carefully calculated based on a variety of factors and the rate type that is right for you largely depends on your current and future position.

Looking for more information on mortgage rates Oakville, how they’re set and which one best suits your needs? The Loewen Group can help!

If you’re considering a mortgage and want to get honest, professional advice from a qualified broker, contact us today!


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