When Do Mortgage Rates Go Up?
(Two-minute read time)
What causes mortgage rates to go up? Let's break down this question in order to have a better understanding of mortgage rates, why they fluctuate, and how we can use this knowledge to potentially save ourselves money on our mortgages.
Do you want to find ways to save money on your mortgage?
Contact the dedicated and professional staff at WealthTrack today to learn more about mortgage rates and how the rates can affect you and your home.
Who Sets the Mortgage Rate?
The Bank of Canada (BoC) sets the target for the overnight rate, which is the interest rate that banks charge each other to cover their short-term daily transactions. This target rate also influences what banks will set for their prime lending rate. Historically, the BoC has set these rates eight times a year – in late January, early March, mid-April, late May, early September, mid-October, and early December.
What Are Some Overall Reasons for Why Interest Rates Fluctuate?
Several factors can impact the overnight rates. A few of these factors include the unemployment rate, managing inflation, and attempting to stimulate the economy. But, the type of mortgage you have, whether it's a fixed rate or variable rate, will establish what factors play more of a role in the rate changing.
When Do Fixed and Variable Mortgage Rates Typically Rise?
Since both fixed and variable rates change based on varying factors, it's essential to understand what these circumstances are so you can respond accordingly, mainly if your mortgage term is about to end and you need to sign a new mortgage agreement.
Variable Rate Mortgages
Variable rate mortgages are typically affected by the prime rates of commercial banks. The prime rates are affected by the overnight rate set by the BoC. The BoC will lower the overnight rate if they want to stimulate the economy and increase the overnight rate when they want to decrease inflation. Large banks will then use the overnight rate as a standard for setting their interest rates.
So, when we see the overnight rate change, we will almost immediately see an equal change in variable rate mortgages.
Fixed Rate Mortgages
Although the Bank of Canada also sets fixed mortgage rates, they are established by the current price of Canada Savings Bonds. The game of supply and demand in the bond market helps determine their price, which will then determine their yield. These yields can be viewed as the minimum rate of return that investors expect before making a capital investment for a specific period.
The price of bonds has a pessimistic relationship with bond yields. So, when bond prices increase, bond yields decrease. But unlike the problematic relationship between bonds and bond yields, the correlation between fixed rates and bond yields is positive. If bond yields increase, fixed rates will increase right alongside them. If they decrease, fixed rates will decrease as well.
Need more info? Do you want to find ways to save money on your mortgage? Contact the dedicated and professional staff at WealthTrack today to learn more about mortgage rates and how the rates can affect you and your home.
