Bond yields in Canada have fallen this week after a brief and short lived increase last week. This decrease will help put to rest fears of an impending increase in mortgage rates. In fact we have seen the five year fixed rate drop to about 3.89%.
That being said, interest rates will not stay low forever and the stimulus plans that will help pull us out of a recession will also contribute to the unavoidable inflation we will eventually experience. What is one of the most effective ways to combat inflation….raise interest rates.
How, exactly, are mortgage rates offered by lenders determined? Many Canadian mortgage holders are surprised to learn that the pricing for variable-rate and fixed-rate mortgages are determined by two different means.
First, let’s look at the pricing of variable-rate or “floating rate” mortgages. The rate for these mortgages is tied directly to the Prime rate, which is set by the Bank of Canada, usually through regularly scheduled announcements. A competitive variable rate mortgage is now available at Prime (now at 2.50%) plus .75%, or even lower in some cases. If you have a variable rate mortgage you need to keep an eye on the Prime rate, and keep in contact with your mortgage broker, who can explain interest rate trends. Many variable rate mortgages will allow you to lock-in your rate if you get uncomfortable with the direction rates are heading.
Pricing for fixed rate mortgages follows a separate dynamic, and is a bit more complex. Fixed-rate mortgages are priced in relation to the bond markets, as bonds are the main competing investment to mortgages for investors. Mortgages are priced higher than bonds, usually between 1.10% and 1.30%, to account for higher risk of default and administration costs incurred by investors who hold mortgages as opposed to relatively hassle-free bonds.
The most popular type of mortgage in Canada is currently the five year fixed-rate mortgage. Rates for this type of mortgage have been trending down this year and currently stand at about 3.89% which is very close to the historical low.
With rates for both variable and fixed mortgages relatively low, consumers must decide based on their own preferences and unique circumstances. A mortgage broker can help consumers evaluate their mortgage options and make an optimal choice.”
Brad Compton
Mortgage Consultant, Invis Inc
phn: 416-671-2183
www.YourLowMortgage.ca
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