Decoding the Impact of Economic Principles on Your Mortgage
In today’s ever-changing financial landscape, staying informed about hoe economic factors influence your mortgage rates is crucial. Headlines have been buzzing with news about interest rate hikes, inflation trends, bond yields, and their implications for your mortgage. To make sense of it all, let’s delve into the intricacies of how mortgage rates are affected.
Understanding the Connection Between Government Bond Yields and Fixed Mortgage Rates
Government bonds are critical players in the mortgage rate equation. Bonds are essentially loans to a government or corporation with a fixed interest rate. When interest rates rise, newly issued bonds offer higher rates, which can affect the value of existing bonds. Fixed mortgage rates are influenced by Government of Canada 5-year bond yields, which, in turn are influenced by U.S. Treasuries. When interest rates rise, the value of older bonds decreases, affecting the bond yield.
How Bond Yields Impact Mortgage Rates
The relationship between bond prices and yields in inversely proportional. When bond prices are high due to strong demand, yields are low, making borrowing more affordable. Conversely, lower demand leads to lower bond prices and higher yields, increasing the cost of borrowing. Bond yields are constantly changing due to market conditions, influencing fixed mortgage rates accordingly.
Bond Yields and Fixed Mortgage Rates Benchmarks
Banks and credit unions use the 5-year bond yield as a benchmark for fixed-rate mortgages. Lenders add a “risk premium” to this benchmark, usually 1% to 2%, depending on their risk assessment. This premium can vary between lenders but tends to be more competitive in a competitive mortgage market.
Banks of Canada’s Role in Variable Interest Rates
The Bank of Canada plays a significant role in determining variable interest rates. By adjusting the overnight rate, the Bank influences the prime rate, which in turn, affects variable rate products, including mortgages. When the Bank raises interest rates, borrowing becomes more expensive, impacting variable mortgage rates.
The Impact of the Overnight Rate on Prime Rate and Variable Mortgages
The prime rate, used by banks to set interest rates on variable mortgages, changes in alignment with adjustments to the overnight rate. For example, a 25-basis point increase in the overnight rate leads to a 2.5% rise in the prime rate. As of October 2023, the overnight rate is 5%, and the prime rate stands at 7.20%
All of this information can be overwhelming, we recommend you contact one of our experienced Mortgage Advisors at Client First Mortgage Solutions for assistance with your mortgage needs.
Forbes Advisor – October 18, 2023
