Understanding Your Interest Rates

Regardless of what lender you choose, type of mortgage you decide on, or home you buy, you will need to get acquainted with interest rates. Contrary to popular belief, these numbers aren’t arbitrary nor or they magical. In fact, interest rates are determined using very specific formulas and understanding them can save you a lot of stress and money. Here’s what you need to know about interest rates:

What Are Interest Rates?

While the term “interest rates” gets thrown around a lot, there are many people who don’t actually know what it means. Interest is merely the cost of borrowing money. Interest rates are determined based on a variety of factors including current money supply, the inflation rate, and the length of time the funds are being borrowed.

How Does the Bank of Canada Influence Rates?

The whole purpose of the Bank of Canada is to support and maintain the Canadian economy. One of the ways they do this is by setting its key policy rate eight times a year. The decisions are generally based on balancing inflation. The Bank of Canada’s approach is that Canadians will spend more when interest rates are low, increasing demand for products and services and boosting inflation. On the flip side, too much inflation creates an increasing debt load that can lead to potentially catastrophic consequences for the economy. If the Bank of Canada wants to encourage inflation, they will drop its overnight rates. If they want to decrease it, they will raise them.

How Does the Bank of Canada Affect Lender’s Rates?

As the Bank of Canada’s overnight rate changes, lenders will adjust their own rates accordingly. It is important to remember that this overnight rate is not the only determining factor for lender rates. It is merely a guide. There are other considerations a bank will need to look at. For example, your application and credit history will play a large part in the rates you are offered. That is why it is so important to explore different banks and lenders for a rate that will suit your situation.

Interest rates aren’t exactly rocket science, but there is a little bit of math involved. Don’t get intimidated by the numbers when looking to purchase a new home, have a mortgage broker help guide you in your journey. Mortgage experts like the ones at Source Mortgage can help you decipher exactly what you need and how to get there. Contact us today!