The subject of interest rate movements is a complicated and convoluted one involving the monetary policy of the Bank of Canada and the movement of the debt markets that can (and has) fill hundreds of books. Let’s try to keep it simple here - taux hypothecaire.

A borrower may think that it is his bank that controls what his interest rate on his mortgage will be. The bank is really only reacting to the factors in the economic arena that determine mortgage interest rates:

-Variable rates are determined by the prime rate - taux hypothecaire.
-Fixed rates are determined by the bond market.

The base rate is the rate the bank of Canada charges banks, and it indicates the prime rate that the major banks of Canada will set and this in turn will determine the variable rate on mortgages.

Variable Rates:

If you only look at the variable rate you are given on the day your rate is being fixed, you do not see the whole cost of your mortgage. For example, if you secure a 4.75% variable rate mortgage when the prime rate is 5.5%, you are really obtaining a “prime less .75%” rate. But if the fixed rate is 5.4% for the same period, you may feel you are getting a great deal. However, be aware that if the prime rate changes (which it can eight times each year) your variable rate will change. If it goes to 6%, your rate will go to 5.25%. (hypotheque)

The prime rate is fixed by the Bank of Canada eight times per year. The governor of the Bank of Canada, currently David Dodge, makes an announcement at these times whether the rate will increase, decrease or stay the same, then it stays at this new rate until the next adjustment period.

The factors that have an impact on the Bank of Canada in determining whether to raise or lower the prime rate are numerous, but the principal two are the CPI (Consumer Price Index) and the GDP (Gross Domestic Product). - hypotheque

Increases in the CPI that the Bank of Canada consider inflationary (usually more than 2%) will compel it to increase rates to slow down economic activity and hence inflation. The GDP shows how fast the country is growing and is also a factor influencing inflation and interest rates.

If the economy is growing slowly and has low inflation, the Bank of Canada will tend to lower rates to spur growth; if it is growing strongly and has high inflation, it will increase rates to slow things down - hypotheque.

Fixed Rates:

It can more easily be said that fixed rates are determined by banks and lenders, but they in turn are steered by other factors, such as their earnings on investments and their costs of funds.

Lenders such as banks and mortgage companies trade the mortgages they originate on a secondary market. They do this fairly constantly to balance their portfolios and try to get the best return for them.

The competition in this secondary market is the bond market. Investors who prefer to buy mortgage portfolios also like to buy bonds. They are “fixed market” investors. So the banks have to keep their rates on their mortgages competitive with the bond market. If bond rates increase, the bank has to increase its mortgage rates to compete. When bond rates decrease, mortgage rates tend to go down as well. (taux hypothecaire)

There are a lot of influences on the determination of interest rates, both variable and fixed. (And this was just the simple version!) When you understand that banks, other lenders, bond market investors, the Bank of Canada, the CPI and the GDP are all influencing your home loan rate, you can see that it is a complexly linked area of study - taux hypothecaire.

The solution for the non-expert is to find a reliable mortgage counselor to help him through this maze of information and can help him determine how these factors can or should influence his mortgage decisions. Working with a bona fide mortgage consultant will let you find the best strategy with the best rate in your particular situation. (taux hypothecaire)

Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rate - taux hypothecaire, visit: Hypotheque - Get a mortgage