Factors That Influence Variable and Fixed

The turbulent past few weeks in the global economy has been playing havoc with interest rates as the Bank of Canada was among several global central banks to drop their prime lending rates to try and slow down the economic downturn. Royal Bank, TD and Scotiabank, along with the rest only dropped their Prime rate by 0.25% versus the 0.50% decrease by the Federal government. This resulted in Canadian mortgage rates actually increasing which again goes against normal market behaviour. This results in a very interesting question – what actually affects Canadian mortgage rates?

Many people believe that the Bank of Canada’s monthly interest rate decisions directly affects all mortgage rates, but that’s not the case. Variable (ARM or adjustable mortgage rates) and fixed mortgage rates in Canada are actually influenced by different factors.

Fixed mortgage rates

Canadian fixed mortgage rates are affected by the price of government bonds and the bond yield. When the Canadian government’s longer term bond prices, such as the 5 year increase, this results in a decreased yield (return), typically reducing the five year borrowing costs for mortgage lenders who can then pass these savings onto customers in the form of lower 5 year fixed mortgage rates.

Variable mortgage rates

The Bank of Canada plays a big part in determining variable mortgage rates as they set the target overnight target rate which they describe as:

“the average interest rate that the Bank wants to see in the marketplace for one-day (or “overnight”) loans between financial institutions.”

As a result, interbank lending rates have increased and this higher cost is being passed onto customers in the form of higher interest rates.

Are fixed or variable rates the better option?

The average savings was $20,630 over 15 years per $100,000 borrowed, and he stated “over the long run, homeowners really do pay extra for fixed-rate mortgages.” By Kelvin Mangaroo

Canadian Mortgage Rates – Canada’s Mortgage Markets & the Global Liquidity Challenge
By Dennis Goodwin

Canadian mortgage markets are emerging relatively unscathed from the global ‘credit crunch’ that was triggered by the collapse of the sup-prime mortgage market in the United States and which is sustained (though diminishing) by current U.S. economic woes. Are Canada’s markets, principally her financial markets, following our neighbours south-of-the-border south? How will the rates Canadian banks charge their customers for home, mortgages, auto loans, lines of credit etc. be affected by the banks’ needs to tap into global credit markets that are somewhat over-strained, and therefore able to command higher interest rates for institutional borrowers? Will interest rates be going up to reflect the perceived risk of personal and secured loans in tough economic times? Or, will banks reduce their risks and keep interests relatively low by tightening their lending practices?

Mr. Clark, in speaking of T-D Bank’s short-term prospects in a chastened banking climate, seems to have noted these pressures. Canada’s central banker has taken an active yet, so-far conservative approach to the struggle of Canadian financial institutions with the global liquidity crunch. In late April, the Bank of Canada cut its main overnight lending rate, the benchmark rate that Canadian banks, credit unions and caisses populaires have traditionally used to set their prime lending rate, by .5%. (It was the Bank of Canada’s second rate cut in six weeks.) Talking about the need for central banks to have more direct influence on lending markets in the wake of global liquidity tightening brought about by the collapse of the U.S. sub-prime mortgage market, Gov. Carney made a pitch for central banks to work together to address situations where there is too much liquidity – i.e., money available on the global financial markets for banks and other financial institutions to lend to us – as well as too little. Gov. Carney is now sounding “bearish” on the subject of whether or not Canadians can expect further cuts to the Bank of Canada’s main lending rate in June. The National Post, which is rivaled only by the Globe and Mail amongst Canadian newspaper for financial acumen, reported Gov. Carney as being “tightlipped about whether the Bank of Canada was inclined to make further interest rate cuts.” When the Bank of Canada reconvenes in June to examine its main rate, don’t expect a further rate cut, even a moderate cut.

Learn more our best advice on 97% Of American Homeowners Overpay Their Lender In Mortgage, Refinancing Your Home Mortgage Loan With Bad Credit, 4 things to watch out for when choosing a mortgage company, and Mortgage Insurance Rates.