Understanding Trends Behind Current Mortgage 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. The current mortgage rate for a competitive variable mortgage is Prime (now at 2.25%) plus 0.40%, or even lower in some cases. “Those with variable rate mortgages need to keep an eye on the Prime rate,” asserts Brad Compton, mortgage agent with Invis, Canada’s largest mortgage broker, “and should keep in contact with a mortgage broker, who can explain interest rate trends.”

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. Current mortgage rates for this type of mortgage have began trending up and currently stand at about 4.39%, which is a bit higher than the 3.50% we were seeing just a month ago.

“With current mortgage rates for both variable and fixed mortgages relatively low, consumers must decide based on their own preferences and unique circumstances,” says Brad, “A mortgage broker can help consumers evaluate their current mortgage options and make an optimal choice.”

Brad Compton is a Mortgage Consultant at Invis Inc.
phn: 416-671-2183
bradcompton@invis.ca
www.YourLowMortgage.ca