Why do Mortgage Rates Change?

Let’s take a look at the factors that influence fixed and variable mortgage rates.

Fixed Mortgage Rates

The main factor affecting fixed mortgage rates is Government of Canada bond yields.

When bond prices increase, bond yields decrease, and when bond prices decrease, bond yields increase. Bonds are typically considered safer investments than stocks, especially Government bonds and as such bond prices typically decrease when the market is booming, and increase when the market is not strong.

When bond yields increase, fixed rates increase, and when bond yields decrease, fixed rates decrease. The bond yield is the return  an investor will receive by holding  a bond to maturity.

When the stock market is booming, investors are more likely to make a higher return on investing in the stock market than investing in bonds. Therefor the demand for bonds decreases, meaning that the price of bonds decreases, and the bond yield increases. As such, fixed rates will likely increase.

On the other hand, when the Canadian economy becomes less stable and stocks do not look as good, investors are more likely to invest in safer investments such as bonds. Therefor the demand for bonds increases, meaning that the price of bonds increases, and the bond yield decreases. As such, fixed rates will likely decrease.

Variable Mortgage Rates

The Bank of Canada is responsible for changes to variable mortgage rates because they determine the target overnight lending rate. The overnight rate is the interest rate which large banks borrow and lend one-day funds amongst themselves.

Let’s say the current overnight rate is 1.50% and the major banks prime rate is 3.70%. If the Bank of Canada increases the overnight rate from 1.50% to 1.75% , the banks will likely follow suit and increase their prime rate by the same 0.25% to 3.95%.

Let’s use the above rate change example on a $300,000 mortgage amortized over 25 years. An increase of 0.25% would result in your monthly payments increasing by $40.28/month.