Simplifying the Puzzle of the Canadian Mortgage Rate

The mortgage rate is a much dissected, scanned, and closely scrutinized issue around the globe. So what gives?

Mortgage Talk

People love to brag and they brag the loudest when they get the best mortgage rate. They are entitled to their bragging rights; after all, they are talking about long term financial obligations and long term is anywhere from 10, 15, 20, and 30 years. If you have bagged the lowest prevailing rate for your mortgage while your peers snagged a higher interest rate, wouldn’t you brag too?

The mortgage rate is the interest rate attached to the money you borrowed from the mortgage company. Contrary to rumors, this rate is not entirely dependent on central banking. If the bank shifts or adjusts rates, the mortgage company may or may not be affected.

So if you have heard that rates are at their lowest, don’t rush headlong to the nearest lender. The new low interest rate may only involve short term-loans, so there you are. The central government may lord it over open rates only if it is clearly stipulated as connected to the prime rate. These days however, people prefer closed rate because this is more predictable.

Factors that Influence Mortgage Rates

You borrow money but who owns that money? You can say that bank owns the money or the government owns the money. This is how it works. The bank borrows money from the government at lower interest rate and lends you the money at a higher interest rate! The government and the bank earns from the deal.

Lenders who invest in Treasury Bills and Treasury Notes or in longer-term investments such as the Treasury Bonds are tied to the fluctuating rates of their investments, which then influence their lending rates. Or lenders sell the mortgage to investors and that interest paid on the mortgage provides the source of money for those investing in mortgage-backed securities. The more mortgages are bought the more money the lender earns and more people can get loans to buy homes.

There is inflation. When prices increase, the purchasing power of the currency dips. To avert this, higher mortgage rates are applied to maintain the value of investment earnings or investors wouldn’t be earning the income they are expecting. If you have taken out an FRM, you can be sure that the rate includes room for inflation.

The Rates

There are three types of mortgages – open, closed, and convertible – and the open mortgage has the highest rate but allows you to make large payments without loading you with additional fees plus you can pay off the mortgage in a shorter time.

The closed mortgage has the same rate throughout the life of the loan. But if you want a convertible mortgage to allow you to make a switch from fixed to variable rate without penalty, then this is it.

Whatever rate you choose, fixed or variable, this is compounded semi-annually unlike in the US where rates are compounded monthly. If you have a 6% rate, that’s something in the area of 3% every six months. Now you have the big idea.

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