If you’re looking for a trusted, experienced, and knowledgeable Regina mortgage broker to help a first-time home buyer, I am here to help. No matter what stage you are in the mortgage process, I can assist you in securing financing to get the home of your dreams. I also understand that all those mortgage rules and regulations surrounding the process can be confusing. My team and I are here to answer all your mortgage questions and take you to home ownership. In my latest tip, I explain what drives variable mortgage rates.
As a mortgage broker based in Regina, Saskatchewan, I’m frequently asked: “What determines variable and adjustable mortgage rates in Canada, and how do they differ?” For the sake of this article, I’ll refer to both types of fluctuating rates as variable-rate mortgages. However, I’ll explain the key differences between them at the end, so keep reading!
Several factors influence mortgage rates, but the primary driver of variable rates in Canada is the Bank of Canada’s (BoC) overnight lending rate. Let’s take a closer look at what this means and how it affects you as a borrower.
What is the Bank of Canada’s Overnight Lending Rate?
The Bank of Canada is the country’s central bank, and its primary role is to manage the nation’s monetary policy. One of the key tools it uses is the overnight lending rate, sometimes called the policy rate. This rate is the interest rate at which major financial institutions borrow and lend to each other overnight.
When the Bank of Canada adjusts this rate, it has a ripple effect throughout the economy, including the interest rates that consumers pay on loans, such as mortgages.
How the Overnight Rate Affects Variable Mortgage Rates
Variable-rate mortgages are typically tied to a prime rate, which is the interest rate at which banks lend money to their most creditworthy customers. The prime rate is generally a set percentage above the Bank of Canada’s overnight rate.
For example, if the Bank of Canada raises its overnight rate, banks will raise their prime rates in response, and the interest rates on variable-rate mortgages will also increase. Conversely, if the Bank of Canada cuts the overnight rate, banks may lower their prime rates and decrease your mortgage rate.
The Connection Between the Bank of Canada’s Monetary Policy and Inflation
The Bank of Canada adjusts the overnight rate primarily to control inflation and stabilize the economy. When inflation is rising too quickly, the Bank may increase the rate to cool down consumer spending and borrowing. On the other hand, if the economy is slowing down and inflation is under control, the Bank might lower the rate to encourage borrowing and investment.
Because variable mortgage rates are influenced by the overnight rate, borrowers with variable-rate mortgages often feel the impact of these changes directly. For example, if the Bank of Canada hikes rates to curb inflation, homeowners with variable-rate mortgages may see an increase in their monthly payments.
Variable vs. Adjustable Rate Mortgages
Both variable rate and adjustable rate mortgages are influenced by changes in the bank’s prime rate. However, there is one key difference between the two:
Variable Rate Mortgages: In most cases, your monthly mortgage payment remains unchanged when the prime rate changes. Instead, the portion of your payment going toward interest or principal will adjust. When rates go down, more of your payment will go toward paying off the principal, and when rates go up, more will go toward interest. This can affect your effective mortgage amortization, making it longer or shorter depending on whether rates increase or decrease.
Adjustable Rate Mortgages: Unlike variable rate mortgages, your monthly payment will adjust when the prime rate changes. The adjustment ensures that your payment remains aligned with your original amortization schedule, meaning your payment amount will either go up or down based on rate fluctuations.
Fixed vs. Variable: What Does This Mean for Homebuyers?
While fixed mortgage rates are generally not as directly impacted by the Bank of Canada’s decisions, variable rates can fluctuate more significantly. In times of rising interest rates, some homeowners may find their mortgage payments increasing as their lender adjusts the prime rate in response to the Bank of Canada’s moves. However, in times of decreasing rates, variable mortgage holders could benefit from lower payments.
That said, variable-rate mortgages are generally seen as a riskier choice in a rising interest rate environment but can be beneficial in times of stable or falling rates.
What Should You Do?
As an award-winning mortgage broker here in Regina, I always advise homebuyers to carefully consider their tolerance for risk when choosing between a fixed and variable-rate mortgage. While the Bank of Canada’s overnight rate is the main driver of variable mortgage rates, other factors, such as inflation, economic growth, and global financial conditions, also play a role.
If you are considering a variable mortgage, it’s essential to stay informed about economic conditions and anticipate how the Bank of Canada’s policy decisions might affect your rates.
If you need personalized advice, I’m here to help. Whether you’re a first-time homebuyer or refinancing an existing property, I’ll work with you to find the best mortgage solution based on your financial goals.
In Summary
The primary driver of variable mortgage rates in Canada is the Bank of Canada’s overnight lending rate. This rate affects the prime rate that banks use to set interest rates on loans, including mortgages. While variable rates can provide flexibility and potential savings in a falling rate environment, they also come with the risk of rising rates during periods of economic tightening.
Understanding how the Bank of Canada’s monetary policy affects mortgage rates can help you make more informed decisions about your home financing options. Feel free to reach out to me for more guidance on choosing the right mortgage strategy for your situation!
PLEASE NOTE:
Mortgage rules and lender policies change all the time. Because I have access to many lenders and have specialized expertise in structuring mortgage applications, I can determine the optimal way to structure your application to maximize the utilization of things like employment income, self-employment income, Canada Child Benefit income, disability income, maternity leave, down payment sources, credit issues, debt ratios, etc. The choice of lenders, combined with his experience, can make the difference in qualifying and/or qualifying for the amount you want. It’s not just about the best rate; it’s about flexibility and choices.
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