What impacts Variable and Fixed Mortgage Rates in Canada

To check the economic downturn, Bank of Canada dropped their prime lending rate. As a natural sequel, Big Banks such as Royal Bank, TD and Sctiabank also cut their lending rate by 0 .25%.

This move triggered to fall the interest rate in the midst of turbulent global economy.

But these dropping rates in prime lending have also caused to increase the Canadian mortgage rate. So, we are inquiry that what are the factors that are impacting the mortgage rates in Canada?

There is a wide array of issues ranging from International gas price, import-export rate, unemployment rate, inflation rate along with budget deficit and surplus that most of us consider to be most influential factors. But there are some other instruments that impact the fixed rate mortgage and Adjustable mortgage rate in Canada.

Fixed Mortgage Rates

The price of Government bonds determines the fixed mortgage rate in Canada. Generally, bond investment and particularly in Government bond is a secure investment than stock. During economic turbulence, investors tend to invest in bond. But when stock market is on the upswing, investors will booze around stock market in expectation of getting higher return.

When there is high demand for bonds, the yields of bonds gradually decrease and when the demand is at the bottom level, then their yields increase. So, at a turbulent economic condition, when investors get averse to Canadian stock market, they naturally tend to Canadian bonds. Thus the demand for bonds increase and consequently its yields decrease.
So, when long term bond price in Canada increases, it decreases the borrowing cost of mortgage rate for the mortgage lenders. Then the mortgage lenders can offer their consumers a fixed low rate mortgage interest for specific period of time.

Variable Mortgage Rate

Banks of Canada take significant role in fixing the variable mortgage interest rate.  They are empowered to set the overnight target rate as they put it, “the average interest rate that the Bank wants to see in the marketplace for one-day (or “overnight”) loans between financial institutions.”

But The Bank of Canada has nothing to do with the prime lending rate set by individual financial institution. The rate is determined on the basis of the cost of short term funds.

It has to be noted that variable interest rate is allied to prime rate. When the Banks of Canada raises the basis points, the lenders increase the prime rate. And when prime rate increases, the cost of borrowing also increases and consequently it raises the variable interest rate.

About The Author:

Regina King is a financial writer associated with many financial communities and websites. She has been consistently advising people on mortgage, bankruptcy, insurance and debt management program since 2007.