When Do Mortgage Rates Go Up?
(Two-minute read time)
What causes mortgage rates to go up? Let's break down this question in order to have a better understanding of mortgage rates, why they fluctuate, and how we can use this knowledge to potentially save ourselves money on our mortgages.
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Who Sets the Mortgage Rate?
The Bank of Canada (BoC) sets the target for the overnight rate, which is the interest rate that banks charge each other to cover their short-term daily transactions. This target rate also influences what banks will set for their prime lending rate. Historically, the BoC has set these rates eight times a year – in late January, early March, mid-April, late May, early September, mid-October, and early December.
What Are Some Overall Reasons for Why Interest Rates Fluctuate?
Several factors can impact the overnight rates. A few of these factors include the unemployment rate, managing inflation, and attempting to stimulate the economy. But, the type of mortgage you have, whether it's a fixed rate or variable rate, will establish what factors play more of a role in the rate changing.
When Do Fixed and Variable Mortgage Rates Typically Rise?
Since both fixed and variable rates change based on varying factors, it's essential to understand what these circumstances are so you can respond accordingly, mainly if your mortgage term is about to end and you need to sign a new mortgage agreement.
Variable Rate Mortgages
Variable rate mortgages are typically affected by the prime rates of commercial banks. The prime rates are affected by the overnight rate set by the BoC. The BoC will lower the overnight rate if they want to stimulate the economy and increase the overnight rate when they want to decrease inflation. Large banks will then use the overnight rate as a standard for setting their interest rates.
So, when we see the overnight rate change, we will almost immediately see an equal change in variable rate mortgages.
Fixed Rate Mortgages
Although the Bank of Canada also sets fixed mortgage rates, they are established by the current price of Canada Savings Bonds. The game of supply and demand in the bond market helps determine their price, which will then determine their yield. These yields can be viewed as the minimum rate of return that investors expect before making a capital investment for a specific period.
The price of bonds has a pessimistic relationship with bond yields. So, when bond prices increase, bond yields decrease. But unlike the problematic relationship between bonds and bond yields, the correlation between fixed rates and bond yields is positive. If bond yields increase, fixed rates will increase right alongside them. If they decrease, fixed rates will decrease as well.
Need more info? Do you want to find ways to save money on your mortgage? Contact the dedicated and professional staff at WealthTrack today to learn more about mortgage rates and how the rates can affect you and your home.
FAQ About Mortgage Rates
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The Bank of Canada (BoC) sets the target for the overnight rate, which influences the prime lending rates set by banks. The BoC typically reviews and sets these rates eight times a year.
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Mortgage rates fluctuate due to several factors, including the unemployment rate, inflation, and economic stimulus efforts. The type of mortgage, whether fixed or variable, will determine which factors are most influential in rate changes.
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Variable mortgage rates are influenced by the prime rates of commercial banks, which are affected by the overnight rate set by the Bank of Canada. When the BoC raises the overnight rate to control inflation, variable rates typically increase.
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Fixed mortgage rates are influenced by the current price and yield of Canada Savings Bonds. When bond yields increase due to market demand, fixed mortgage rates usually rise as well.
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Fixed mortgage rates change in response to fluctuations in bond yields, which are affected by supply and demand in the bond market. A rise in bond yields usually leads to an increase in fixed rates.
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The Bank of Canada reviews and potentially adjusts the target for the overnight rate eight times a year.
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By understanding the factors that influence mortgage rates, homeowners can time their mortgage agreements or refinances to take advantage of lower rates, potentially saving money on interest payments over the life of the mortgage.
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Fixed Rate Mortgages: The interest rate is set for a specified term and does not change during that period, providing stability in monthly payments.
Variable Rate Mortgages: The interest rate can fluctuate with changes in the prime rate set by banks, which is influenced by the BoC's overnight rate.
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To manage inflation, the Bank of Canada may increase the overnight rate, which can lead to higher mortgage rates. Higher interest rates make borrowing more expensive, which can help control inflation by reducing spending.
To learn more about inflation, read our article: Managing Inflation: Guide to Protecting Your Finances
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