When applying for a mortgage, one of the most pressing decisions a borrower must make is with respect to the interest rate. Should you lock into a fixed rate? Should you take a chance on a variable rate? These are important questions that need answers so that the homeowner doesn’t find themselves saddled with a mortgage they can’t afford because the rate increased.
Knowing what can cause the interest rate to change can help you make the right decision. This knowledge can help you predict how the interest rate might fluctuate over the duration of your mortgage, and ultimately, prepare for any changes.
The Health of the Market
It’s normal for interest rates to increase when a market cools down. This gives buyers less money to purchase a home with and can lead to housing prices dropping as sellers look to unload their properties.
The housing market is directly tied to interest rates so be sure to understand the state of the market. Whether it is prosperous or struggling should inform your mortgage terms.
The Bank of Canada
The Bank of Canada influences interest rates as part of their overall economic and monetary strategies. This institution can dictate rates, including the overnight rate for banks, and can impact the Canadian exchange rate.
Owned by the Federal Government, The Bank of Canada is tasked with ensuring the financial welfare of the Canadian economy. What’s important for homebuyers to know is that The Bank of Canada takes the approach of steady growth and to avoid jarring interest rate fluctuations.
Provincial and National Economy
As mentioned, interest rates play off the supply and demand of the housing market. When demand is high, lenders want to charge more to borrowers to capitalize. When demand is low, lenders want to charge less to spark business.
Economic conditions fluctuate interest rates making the Provincial and Federal Government the biggest factor in determining the interest rate. The Government will act in accordance with the state of the economy and pursue stimulating it or cooling it through raising or lowering the interest rate, which will trickle down to borrowers.
The more borrowers understand the nature of interest rates, the more likely they are to make the right decision with respect to choosing the mortgage terms that work for them.
