Mortgage Rates: Where do they come from?

While homebuyers are out to find a home, lenders are out to make a profit. After all, theirs is a very important business. Lenders earn their living by charging interest on the money you borrow to make big purchases. While this arrangement is fairly common knowledge, many folks still find it a mystery as to how these lenders determine their rates. In today’s article, we are going to pull back the veil and reveal just exactly what factors impact mortgage rates.

Ultimately, the rate that your lender offers you will be based on two independent components: the general interest rate market and risk-based pricing. By calculating these two variables, you have your mortgage rate. In examining the general interest rate market, it is important to recognize that there are different determinants which influence variable mortgage rates and fixed mortgage rates.

Variable Rate Mortgages

Variable mortgage rates are determined by commercial banks’ prime rates. These prime rates are based on the Bank of Canada’s overnight rate. This number is called the overnight rate because it concerns transactions that occur over short periods of time. Thus variable-rate mortgages will fluctuate with the lender’s prime rate.

Fixed Rate Mortgages

Fixed mortgage rates work a little differently since they are locked in at the beginning of a term. These loan rates are primarily influenced by Canadian government bonds of corresponding maturity. Bond yields are no-risk endeavors for banks and are one of the ways that they can make money. Mortgages, on the other hand, are very high risk for lenders. Because of this, banks use bond yields to balance out potential losses through mortgage loans. In short, ff bonds are doing exceptionally well, the bank will have more confidence to offer lower mortgage rates.

Risk-Based Pricing

Regardless of the mortgage product you choose, variable or fixed, your lender will always need to take your unique situation into consideration. Essentially, how big of a risk will it be for the bank to lend you large sums of money? If they determine that you are a high risk, your rates will be higher even if the general interest rate market is doing well. That is why it is so important to take control of personal factors like your credit history and financial status before you apply for a mortgage.

Mortgage rates don’t have to be mysterious, in fact, it’s much better if you are armed with the knowledge of how they are determined! That way you can navigate through your home buying journey making informed decisions. But we know that not everything is simple when it comes to mortgages, and that’s where we come in: to help you achieve your dream home as smoothly as possible. If you’re thinking of buying your first home, or even your second, give us a call to see what we can do for you!

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