Why Do Mortgage Rates Fluctuate?

Whether you are looking to take out a personal loan or a mortgage, you may have noticed that interest rates can change from one week to the next. Most potential homeowners look to get the lowest rates possible when applying for a mortgage and, depending on your credit score and history, each person is eligible for different rates. If you have a variable-rate mortgage, you will have noticed that your payments are different each month, based on the current rate of interest. If you are wondering why interest rates fluctuate, our expert Kitchener mortgage broker team can tell you why.


Growth in the Economy

Our economy is sensitive to national and global situations. It can be impacted negatively by natural disasters, conflict, and inflation. We’ve seen the effects of this through the recent conflict in Ukraine and felt the impact that the COVID pandemic had on the global economy. When the economy grows at a healthy rate, we see a rise in money demand, which makes interest rates rise. When the economy is unhealthy or slow, interest rates drop, which causes a rise in inflation. This in turn can see a rise in prices and a drop in spending power. This results in lenders raising interest rates to protect themselves. 


The Impact On Fixed-Rate Mortgages 

In Canada, bond yields are what have an impact on fixed-rate mortgage loans because they mirror government bond yields with the same term time. With a fixed-rate mortgage, the rate is generally locked in for a specified time period. A bond yield is how much money an investor can recoup once the bond matures and they are seen as safer than stocks. When we have a rise in bond prices, we will see a dip in bond yields. When bond prices dip, we see a rise in yields. Fixed-rate mortgages mirror the fall and rise of government bond yields.


The Impact On Fixed-Rate Mortgages and the Stock Market

Another factor that affects interest rates is the stock market. When we are experiencing a healthy market, we also see a drop in bonds and a rise in fixed interest rates. The reason for this is that investors see a better yield from stocks and the demand for government bonds lowers, along with their pricing. When the market is not as healthy, we will see a rise in yields from bonds and a drop in fixed rates.


The Impact On Variable Mortgage Rates

When it comes to variable-rate mortgages, it’s a different story. Variable rates are impacted by the Bank of Canada and the overnight lending rate target. Based on what the prime rate is, we will see a fluctuation in variable rates each month. 


Variable Rate Mortgages and Overnight Rate 

The overnight rate has a bigger impact on short-term funds as well as the costs of borrowing and lending. The Prime Rate is also impacted by the overnight rate, so when the prime rate rises, variable-rate mortgages will mirror that. This impacts your monthly mortgage repayments. The bigger banks rely on the overnight rate for lending money and for daily borrowing.

Here’s an example:

If the overnight rate is set at 0.5% and the larger banks have a 2.50% prime rate, the variable rate is determined by subtracting the overnight rate from the prime rate. This would give us a variable rate of 2.0%. If the Bank of Canada raises the overnight rate to 0.75% from 0.25%, the bigger banks will raise their prime rates to 2.75%, which would give us a 2.25% variable rate.

When we apply this 0.5% rise to mortgage loans, a mortgage of $250,000 that has a term of 25 years would see a rise of $30.40 a month in their repayments. 

Interest rates can be affected by many factors, from the health of the economy to the price of bonds and stocks. We’ve been seeing a rise in rates as a result of a global economy that is a bit uncertain right now. If you want to see what rates are available to you, give our expert Kitchener mortgage broker team a call today!

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