One of the decisions a prospective buyer needs to consider is whether they go with a variable-rate mortgage or fixed-rate mortgage. My first piece of advice is don’t go about this decision on your own; engage a competent mortgage broker to help you weight the pros and cons of each. The rates for both types are set in different ways.
Government policies to protect the economy during the Covid pandemic resulted in exceptionally low mortgage rates, both fixed and variable, and have contributed to the current housing boom. As the economic recovery has continued, fixed rates have started to move upwards. The prime rate, which variable rates are based on, has not increased. Let’s look at both types to see why fixed rates have increased while variable have not.
How are variable rates set?
The chartered banks set the prime lending rate (the rate they offer their best customers). They base their decisions on the Bank of Canada’s overnight rate because that is the rate that influences their own borrowing. Variable-rate mortgage rates and lines of credit move in conjunction with the prime lending rate, with most lenders currently offering variables at prime minus a certain percentage.
How are fixed rates set?
Fixed-rate mortgages are a little different. Banks predominantly use Government of Canada bonds to raise money for fixed-rate mortgages. In the bond market, interest rates can fluctuate more often since they are subject to the changing moods of traders and bond investors as they try to figure out how fast the economy will grow and where inflation is headed. Keeping watch on the bond market will give clues on where fixed mortgage rates will go next. Recently the 5-year government bonds went up, causing fixed rates to do the same.
There are so many different interest rates because there are other factors besides fixed and variable that affect rates. There are rate premiums for certain situations and different rates for insured and uninsured mortgages. Rock bottom rates come with restrictions and high penalties. It is for this reason that working with a qualified mortgage broker who will provide you with professional and unbiased advice is so important.
***Some information provided by Mark Hurley, Mortgage Broker, Mortgage Intelligence
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.