Who decides if interest rates will go up or down? - pret hypothecaire

In order to pick the right mortgage strategy that will save you the most money, you have to understand the factors that interest interest rates increases and decreases - taux hypothecaire.

This is a very complex subject, the topic of any number of books and business school dissertations. We’ll try to keep it basic here by discussing how the Bank of Canada’s fiscal and monetary policy along with the movements of the debt markets influence rates - hypotheque.

Many borrowers may believe that their banks determine interest rates. Banks only set interest rates because of other rates and factors that they are faced with. In general, variable rates are determined by the prime rate, and fixed rates are determined by the interest rates in the bond markets - pret hypothecaire.

The Bank of Canada fixes a base rate, and that determines the prime rate the major banks in Canada set. This in turn sets the rates on variable rate home loans.

VARIABLE RATES:

Most people only consider the variable rate. They are happy when they feel they can get a 5 year variable home loan at 4.75%, when the 5 year fixed mortgage rate is 5.4%. This is short sighted, since variable rate mortgages rise and fall with the prime rate. If the prime rate is, for example, 5.5%, the borrower with the 4.75% rate actually has a rate which is prime less .75%. When the prime rate increases, his variable mortgage rate will increase with it - taux hypothecaire.

The prime rate is established at certain intervals eight times per year. This is when the Bank of Canada fixes a new rate that may increase, decrease or remain the same in comparison to the old one. It stays at this new level until the next adjustment period.

The factors that have an impact on the Bank of Canada in determining whether to raise or lower the prime rate are numerous, but the main two are the CPI (Consumer Price Index) and the GDP (Gross Domestic Product). - pret hypothecaire

Increases in the CPI that the Bank of Canada consider inflationary (usually more than 2%) will stir it to increase rates to slow down economic activity and hence inflation. The GDP indicates how fast the country is growing and is also an aspect influencing inflation and interest rates.

If the economy is growing slowly and has low inflation, the Bank of Canada will tend to lower rates to encourage growth; if it is growing strongly and has high inflation, it will raise rates to put a brake on - pret hypothecaire.

Fixed Rates:

It can more easily be said that fixed rates are determined by banks and lenders, but they in turn are guided by other factors, such as their earnings on investments and their costs of money.

Most home loan customers now know that banks and other financial institutions buy and sell mortgages pretty regularly to investors in the secondary market. They do this to “balance” their portfolios of mortgages.

The investors the banks sell these mortgages to also invest in the bond market, so the secondary mortgage market has to compete with the bond market. If the rates in the bond market go up, the banks will have to offer increased rates on their mortgage portfolios by increasing the rates on the mortgages they write. When the rates on the bond markets decrease, the fixed mortgage rates can come down to be in line with them. (taux hypothecaire)

Now you understand that the interest rate you will pay on your home loan is determined by decisions made by banks, lenders and investors in the bond markets, the Bank of Canada, the CPI and the GDP. These players all join in a complex structure that takes a lot of analysis by experts - pret hypothecaire.

The solution for the non-expert is to find a qualified mortgage consultant to help him through this maze of information and can help him determine how these factors can or should influence his mortgage decisions. Working with a bona fide mortgage consultant will let you find the best strategy with the best rate in your particular situation. (taux hypothecaire)

Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage