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When the mortgage rate shifts even the slightest, the shockwave can reverberate throughout the housing market. There is also a potential ripple effect that can impact the job market and the provincial and national economy. Don’t treat mortgage rates as some boogeyman lurking in the closet waiting to scare you. The best advice is to understand what determines mortgage rates so you can forecast, predict and plan with greater ease and assurance.

Let’s review the factors that determine the mortgage rate to make sure you are prepared for whatever is going to happen next.

Economy

A common misconception is that The Bank of Canada sets the mortgage rates. As one of the nation’s most influential institutions, The Bank of Canada determines the overnight rate. Banks use the overnight rate to set their prime lending rate. The Bank of Canada helps stimulate the economy or deal with inflation, both of which could determine mortgage rates.

Since the Bank of Canada is tasked with safeguarding the Canadian economy and providing the overnight rate, the economy plays a distinct role in determining mortgage rates even if it’s at a very high-level.

Purchase Details

The down payment, the location of the property, the price of the property and the loan amount will all factor into determining your mortgage rate. A lender must review the details of the purchase to calculate which rate would apply to your loan. One example of this is that a higher down payment could result in a lower interest rate because a lender sees the loan as less risky.

Credit Score 

Certain factors that determine your personal mortgage rate are out of your hands. Your credit score, though, is a way for borrowers to exercise some control over how much interest they pay on their mortgage. This is based on your history of accruing and repaying debt and tells lenders how much risk is involved with a mortgage application.

A positive credit score means you could possibly receive a lower mortgage rate. A poor credit score means you might have to pay a higher rate to offset the risk.

Contact us to learn more about mortgage rates or to start your pre-approval process.

In July 2019 the Bank of Canada released a statement anticipating stabilization within the national housing and mortgage market. It also confirmed it was maintaining the targeted 1.75% interest rate despite some future uncertainty, particularly around international trade.

During periods of stabilization like this, many homeowners take advantage of a second mortgage as a means to improve or repair their homes. Increasingly these mortgages are taken out with an interest-only repayment schedule.

Homeowners who are intending to sell their property in the short-term future take a second mortgage to pay for any work required. They pay a monthly interest payment on the full loan amount rather than a larger payment towards the interest and principal debt. Then, when they sell their upgraded property, they can pay off the loan with the extra value the improvements have brought.

Whenever a second mortgage or home equity loan is being sought for, one of the key decisions a borrower will have to make beforehand is whether they want their interest rate to be fixed, or to be variable.

Holding Steady

A fixed interest rate is exactly what it sounds like - the rate of interest paid on the principal is fixed for the term of the loan.

For borrowers, fixed rates offer consistency and a predictable payment timeline when rates are rising. No matter how much the Bank of Canada’s rate rises, they know they are locked in at the lower interest rate. Over time the total debt reduces, and the interest payment declines with it, this makes budgeting and saving money easier but doesn’t allow a borrower to benefit when interest rates go down.

For lenders fixing an interest rate also protects them against variances in financial markets. No matter what happens to the Bank of Canada’s benchmark interest rate, the rate they have on this loan stays the same. Lenders tend to prefer the dependable nature of fixed rates as an alternative to trying to forecast what will happen with the interest rate over the life of the loan.

Periodic Change

As an alternative, variable interest rates change over time. The loan will be based on an indexed rate, such as the Bank of Canada’s rate, or another benchmark interest rate such as LIBOR. The rate payable on the loan is equal to the benchmark rate plus a margin amount. So, for instance, a loan may be based on a benchmark rate plus a 2% margin. So, when the benchmark rate is 2% the loan rate is 4%.

When it comes to mortgaging, most lenders offer a product that has an initial period of fixed rates, say five years, followed by the rest of the schedule being paid according to interest rate fluctuations. The payments for the latter period are usually recalculated, or “reset”, based on the underlying interest rate every 1-5 years.

Variable rates offer borrowers a chance to make the most of their money. While interest rates are low the potential for additional payments is higher. Additional payments come off the principal loan, so when rates rise, borrowers are not as badly affected.

For lenders, variable rates offer a form of guarantee as loans come with a margin, while rates may go down over the life of a loan, they are still guaranteed to be getting more than the benchmark rate in interest payments.

Growing Interest

Depending on what you want a second mortgage for, it can be a huge influence on the kind of rate you have. If it’s for improvements to your home prior to sale, debt consolidation, or any other reason, the interest rate is an important factor in getting the best value loan.

Our independent experts have access to hundreds of lenders and their products. With decades of experience, they can find the right financial product for you and ensure that the product has the right interest rate structure for you. Their independence empowers them to find the product that best suits your needs rather than sell you whatever product their employer is incentivizing them to sell.

Contact Canadalend.com today to find out more about what options might be available to you and to speak to someone whose interest is in finding you the best financial product they can.

Contact us to learn more about the Fixed or Variable Rate Second Mortgage options available and experience The Canadalend Advantage today!