The subject of interest rate movements is a complicated and convoluted one involving the monetary policy of the Bank of Canada and the movement of the bond markets that can (and has) fill hundreds of books. Let’s try to keep it simple here - hypotheque.
Borrowers sometimes think that the banks make the decision to raise or lower rates. To a certain extent, this is correct, but they are doing it in reaction to other factors. In regard to mortgage rates, the variable rate home loan is controlled by the prime rate and the fixed rate home loan is controlled by the cost of funds of the lenders. (hypotheque)
The base rate is the rate the bank of Canada charges banks, and it indicates the prime rate that the major banks of Canada will set and this in turn will dictate the variable rate on home loans.
VARIABLE RATES:
Many people only look at the variable rate. They are excited 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 goes up, his variable mortgage rate will go up with it - taux hypothecaire.
The prime rate is fixed by the Bank of Canada eight times per year. The governor of the Bank of Canada, currently David Dodge, makes an announcement at these times whether the rate will increase, decrease or stay the same, and it will stay at this new rate until the next adjustment period.
The prime rate is used by the Bank of Canada to control growth and inflation. The consumer price index (CPI) and the gross domestic product (GDP) are the tools that BOC uses to determine the prime rate. (taux hypothecaire)
Strong increases in the CPI (2% or above) signal inflation and the Bank will tend to increase rates to forestall inflationary tendencies. GDP measures the country’s economic activity and is also influenced by inflation, so it is a factor that the Bank of Canada keeps an eye on to determine rates.
If the GDP and the CPI have slow rates of growth, the Bank of Canada will most likely lower rates to encourage investment and purchases but, on the other hand if they are growing strongly, they will increase rates. (taux hypothecaire)
Fixed Rates:
Each lender does, in a way, fix its own fixed lending rates, but they are also keenly influenced by factors outside their control: earnings and cost of funds.
Banks and other mortgage lenders trade the mortgages in their portfolios in a secondary market. They try to keep their portfolios balanced and also to maximize the return on them
These investors have a choice between bond portfolios and mortgage portfolios, so if the rate in the bond market goes up, lenders will have to have a higher rate on their mortgages to attract these investors. How do they get the higher rate? By increasing mortgage rates. If the bond rates come down, the lenders can decrease their rates. The bond market rates are deeply influenced by the rates fixed by the Bank of Canada. - taux hypothecaire
There are a lot of influences on the determination of interest rates, both variable and fixed. (And this was just the simple version!) When you understand that banks, other lenders, bond market investors, the Bank of Canada, the CPI and the GDP are all influencing your mortgage rate, you can see that it is a complexly linked area of study - taux hypothecaire.
The solution for the non-expert is to find a reliable mortgage consultant to help him through this maze of information and can help him determine how these factors can or should influence his mortgage choice. Working with a bona fide mortgage counselor will let you determine the best strategy with the best rate in your particular circumstances. (taux hypothecaire)
Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage