On Monday of this week, Royal Bank, TD Canada Trust and Laurentian Bank all raised fixed rates on closed mortgages. On Tuesday, The Bank of Montreal and CIBC followed suit and raised their rates as well. Across the board the posted rates increased by .10 to .15% on popular 5 year mortgages.
Although changes in mortgage rates have a large impact on Canadian families’ cash flow it is confusing as to how the interest rates are derived and what factors influence changes in the rates. I’ll try and outline some of those factors in the post today.
Mortgages rates in this country come in two main flavours, fixed and variable. The variable rates (or adjustable rates) can and often will change over the term of the mortgage. They are tied to the prime rate plus or minus a modifier. For example, a borrower with strong credit and a strong application may get a mortgage with a rate of prime minus .80%, at today’s prime rate of 3.00% their current rate would be 2.20%. The prime rate itself is derived by the banks taking the key overnight rate offered by the Bank of Canada and adding a margin. Thus your variable interest rate is linked to the key rate set by the bank of Canada, (see here as to how the bank sets the key rate).
Fixed interest rates are established in a slightly different way. They are derived from the yield on Canadian Government Bonds of similar term. For example, for a 5 year fixed mortgage, the lender will look to risk free 5 year government bonds as a baseline rate. They will then add a rate premium for expenses, profit and additional risk of lending that money in the form of mortgages. For more information on projections on fixed rates please check out the Bank of Canada website.
Mortgage borrowing choices can be confusing. I am always available to offer some 3rd party advice on these tough issues.
Have a nice weekend!
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