How Mortgage Rates Are Determined
Mortgage rates are influenced by several factors, both within and outside your control. Understanding these factors can help you make better decisions about when and how to get a mortgage.
Economic Factors
Bank of Canada Policy Rate
The Bank of Canada sets the overnight lending rate, which directly influences variable mortgage rates and indirectly affects fixed rates. When the central bank raises rates to combat inflation, mortgage rates typically follow.
Bond Market
Fixed mortgage rates are closely tied to the bond market, particularly 5-year government bond yields. When bond yields rise, fixed mortgage rates usually increase as well.
Inflation
Higher inflation often leads to higher interest rates as lenders need to maintain real returns on their loans.
Personal Factors That Affect Your Rate
Credit Score
A higher credit score demonstrates lower risk to lenders, often resulting in better rates. Aim for a score above 680 for the best conventional rates.
Down Payment
Larger down payments (20% or more) typically qualify for better rates since they represent lower risk for lenders.
Debt-to-Income Ratio
Lower debt ratios make you a more attractive borrower and may help you qualify for better rates.
Property Type
The type of property you’re buying can affect your rate. Owner-occupied homes typically get better rates than investment properties.
Fixed vs. Variable Rates
Fixed Rates
- Predictable payments throughout your term
- Protection against rate increases
- Often slightly higher than variable rates
- Best for those who prefer stability
Variable Rates
- Fluctuate with the prime rate
- Historically have cost less over time
- Potential for payment increases
- Best for those comfortable with some risk
Tips for Getting the Best Rate
- Shop around - Don’t accept the first rate you’re offered
- Work with a mortgage broker - Access to multiple lenders
- Improve your credit score before applying
- Consider the full picture - Look at terms, not just rates
- Get pre-approved to lock in your rate
The Bottom Line
While you can’t control economic factors, you can optimize the personal factors that affect your rate. Let’s work together to find the best mortgage solution for your situation.
This is a placeholder blog post. Contact Bradley for personalized mortgage advice.