The Truth About How Fixed Rates Are Determined
Purchasing a new home is exciting and, of course, one of the biggest purchases you will ever make. And if you’re like most people who need to borrow money by taking out a mortgage, you will need to decide whether you should choose a fixed rate or a variable rate mortgage.
But what do you understand about these mortgage rates, and where do they come from? The reason is when you understand how fixed rates are determined, it will assist you in making a choice between a fixed rate and a variable rate, as well as what the trajectory of where fixed rates are heading.
However, most people believe that fixed and variable rates are determined in the same way, which is incorrect. To clear the air and help you see the truth, Keith Uthe Demystifying Mortgages has revealed some facts about mortgage rates and how they can affect your mortgage application. Keep reading to know more.
1. Fixed rates are determined by inflation and GDP
In fact, fixed rates are based on the Bond Yield market. Bond yields are impacted by the movement of capital by investors and certain buying and selling practices of bonds by the federal government, referred to as quantitative easing.
Quantitative easing is an artificial tool the Bank of Canada has been using to apply downward pressure on bond yields. Through the purchase of bonds, fixed mortgage rates have been held down, allowing consumers to take advantage of stable and low-priced mortgage rates throughout the uncertain periods of the COVID-19 pandemic.
The simple conclusion of this news today that the government will discontinue this practice is that rates are no doubt set to move upward quickly (and likely by as much as 20-30 BPS) over the next week or two. In order to help offset the rate risk we will be experiencing in the coming days, please be aware that getting your pre-approval in place sooner rather than later is important if fixed rates are what you want.
Be prepared for the coming rate increase by doing these two simple things and take advantage of current Interest Rates and Product Pricing.
a. Have all of your documents ready to verify for your pre-approval
b. Take action and submit your pre-approval request right away
2. Variable rates are determined the same as fixed rates
The truth is that variable rates are based on the Bank of Canada Prime lending rate, which is determined each time the Board of the Bank of Canada meets every six weeks. The viewpoint right now is the next prime rate increase will not happen until Q2 of 2022.
Variable rates are a prime rate minus a discounted amount and are adjusted based on the Bank of Canada prime rate changes. Variable rates can also be referred to as an adjustable-rate. The difference between these is that with a variable rate the payment remains the same if the rate increases, so more goes to interest and less to principle increasing the amortization. The adjustable rate will change the monthly payment to maintain the amortization period and required principal and interest payments.
As a mortgage broker, it is important that I follow what is happening in the bond market and with the prime lending rate and how it impacts my clients. Being able to assist clients with the overall picture of the choice between a fixed or variable rate mortgage is an important part of our conversations.
For more information about these mortgage rates, reach out to me at Keith Uthe Demystifying Mortgages. I am an independent mortgage specialist with Mortgage Alliance Enrich Mortgage Group, Smith Manoeuvre Certified Mortgage Professional, Real Estate Investment Adviser, and a Legacy Certified Financial Life Planner in Calgary. I provide first-time homebuyer mortgages, mortgage refinances, switch or transfer mortgages, debt consolidation mortgages, equity mortgage lending, construction mortgages, commercial mortgages, business financing, private lending, rental property financing, renovation financing, flip financing, spousal buyout mortgage, and Smith Manoeuvre mortgages. I serve clients in Alberta and coast to coast across Canada.