What affects the Mortgage rate?
The main influence for fixed and variable mortgage rates is the Canadian Government bond yields. Fixed mortgage rates are usually set for the same term as those of the government bond yields, and are mostly a five-year period. However, you can arrange the rate to be locked for a lesser time, anything from 6 months up to a period of 10 years. When considering the pros and cons of a fixed mortgage rate, it’s important to know more or less, the payment plus interest charges for the selected mortgage term. In addition, consideration should be given to a lower risk tolerance, due to variable rates having the tendency to be more volatile. Should you break your fixed rate contract before the end of the term, you will find extra costs attached! Additionally, you also pay more for securing and the locking-in of a fixed rate.
Bond Prices and Yields
Bond pricing is not equal to bond yields. When the bond yields increase so do the fixed rates, but when bonds decrease, the fixed rates decrease. However, when there is less stability in the Canadian economy, investors are apt to turn to bonds for investment, resulting in there being a bond price increase demand. Relatively, the general trend is for bond yield decreases that result in a reduction of fixed rates.
Variable Mortgage Rates
A Variable mortgage rate is determined by the mortgage lender’s prime rate which in turn is based on current economic conditions. The prime rate is the interest rate the major banks use when pricing for short term loans. Remember, the prime rate can increase or decrease monthly. Therefore, a variable rate would also be inclined to increase or decrease accordingly. Having a variable mortgage rate is fine providing the prime rate remains constant and does not increase, meaning your monthly payment remains static.
In the event of you breaking the contract before the end of the term, you will be charged extra and liable for three months interest. A further consideration is that should the prime rate increase you will be liable for any added monthly interest on your mortgage account. This can not only affect your future financial planning but also create issues with present budget management. Before buying your new home, consider all factors carefully, with some professional advice regarding a fixed or a variable mortgage rate for your property.