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24 Mar

Why Do Rates Fluctuate?

Edmonton Mortgage Broker

Posted by: Vaughn Leroux

When house hunting or looking for a mortgage, many people look to get the lowest interest rate possible. Your interest rate will depend on your credit history and financial situation, so not everyone gets the same rates. If you ever had a variable rate mortgage, you’ll know that rates can often change in the market. But what causes rates to fluctuate like this? Our Edmonton mortgage broker team is here to tell you.

Growth in the Economy

The economy is quite sensitive and can be negatively impacted by what is going on in the world, such as natural disasters, war, or a worldwide pandemic, like we have been dealing with since last year. When our economy has been growing at a healthy rate, there is a rise in the demand for money. This causes interest rates to rise. When there is an unhealthy slowing of the economy, we see rates falling. As a result, we see a rise in inflation. When inflation hits a growing economy, it can cause prices to rise and spending power to drop. As a result, lenders will protect themselves by raising interest rates. 

How This Impacts Fixed-Rate Mortgages 

For fixed-rate mortgages in Canada, bond yields are what impact things. A fixed-rate mortgage will mirror government bond yields that have the same term. Fixed-rate mortgages tend to lock in a rate for a specified time, such as 5 years. When it comes to the market, bond yields are seen as safer than stocks. Bond yields are how much you will recoup as an investor when the bond matures. When we see a rise in bond prices, we also see a drop in bond yields. Having bond prices drop will cause bond yields to rise. Fixed-rates will follow the rise and drop in bond yields.

Fixed-Rate Mortgages and the Stock Market

The stock market also has an impact on rate fluctuation. When the stock market is healthy, we see a decline in bonds and a rise in fixed interest rates. This occurs because investors will see a better investment return in stocks, so the demand for bonds drops along with their prices. We also see a rise in bond yields and fixed interest rates dropping.

How This Impacts Variable Mortgage Rates

It’s a different story with variable mortgage rates. These rates are determined by the overnight lending rate target and the Bank of Canada. We see variable-rates fluctuation monthly based on what the prime rate of mortgage lenders is.

Variable Rate Mortgages and Overnight Rate 

The overnight rate impacts funds that are short-term, along with their costs of borrowing and lending. The overnight rate also has an impact on the Prime Rate. When we see a rise in the prime rate, we see this rise mirrored in variable-rate mortgages, which affects your monthly repayments. Larger banks rely on the overnight rate when it comes to the daily borrowing and lending of funds amongst themselves.

For example, let’s say that the overnight rate is 0.5% and the major bank’s prime rate is at 2.50%. In order to determine the variable rate, we would need to subtract the overnight rate from the prime rate, giving us a 2.00% variable-rate. We then have the Bank of Canada raise the overnight rate by 0.25% to 0.75%. This will cause the larger banks to raise their prime rate by 0.25% to 2.75%, giving us a variable rate rise to 2.25%.

Now, let’s apply those rates to a mortgage loan of $250,000 with a 25-year term. The 0.5% rise causes a rise in your repayments of $30.40. 

This is why we can see fluctuation in interest rates, which is impacted by bonds, bank rates, and the overall health of the economy. If you want to take advantage of the current low rates, give our Edmonton mortgage broker team a call today.