In order to pick the correct mortgage strategy that will save you the most money, you have to understand the factors that are behind interest rates increases and decreases - taux hypothecaire.

This is a very complex subject, the topic of innumerable books and business school dissertations. We’ll try to keep it basic here by discussing how the Bank of Canada’s fiscal and monetary policy along with the movements of the debt markets influence rates - hypotheque.

Many borrowers may believe that their banks determine interest rates. Banks only set interest rates based on other rates and factors that they are faced with. In general, variable rates are determined by the prime rate, and fixed rates are determined by the interest rates in the bond markets - hypotheque.

The Bank of Canada fixes a base rate, and that determines the prime rate the major banks in Canada set. This then sets the rates on variable rate home loans.

Variable Rates:

A lot of people just look at the rate they are offered at the beginning of a variable rate loan. They are thrilled that their variable rate is 4.75% when the rate on a fixed rate loan may be 5.4%. They do not realize that their rate can increase every time the Bank of Canada raises the prime rate, which can happen eight times per year. This is because variable rate mortgages are actually determined by the prime, so the rate we spoke about above is .75% below the prime. When the prime goes from 5.5% to 6%, the variable rate will go from 4.75% to 5.25%. (taux hypothecaire)

The prime rate is established at fixed intervals eight times per year. This is when the Bank of Canada fixes a new rate that may increase, decrease or remain the same in relation to the old one. It stays at this new rate until the next adjustment period.

The Bank of Canada uses the prime rate to manage growth and inflation. The governors of the Bank of Canada will monitor the inflation rate, as measured by the CPI (Consumer Price Index), and the GDP (Gross Domestic Product). (taux hypothecaire)

If the CPI is increasing too quickly, the Bank of Canada will want to stifle inflation by increasing the prime rate to slow things down. The GDP indicates the growth of business activity in the country and if it is growing fast it too will have an influence on inflation.

A weak economy with low inflation will usually push the Bank of Canada to lower rates; a strong economy and higher inflation numbers will induce it to raise rates. (pret hypothecaire)

Fixed Rates:

Each lender does, in a way, fix its own fixed lending rates, but they are also keenly influenced by factors outside their control: earnings and cost of funds.

Most mortgage consumers now realize that banks and other financial institutions buy and sell mortgages fairly regularly to investors in the secondary market. They do this to “balance” their portfolios of mortgages.

The investors the banks sell these mortgages to also invest in the bond market, so the secondary mortgage market has to compete with the bond market. If the rates in the bond market increase, the banks will have to offer increased rates on their mortgage portfolios by raising the rates on the mortgages they write. When the rates on the bond markets come down, the fixed mortgage rates can come down to be in line with them. (hypotheque)

So the interest rates that the average person is paying on his mortgage is determined by decisions made by banks and other lenders, investors in the bond market, the Bank of Canada, the CPI and the GDP. All of this sound complicated? It is. They are all linked together. (taux hypothecaire)

The only way around this complicated issue is to partner with an accredited mortgage counselor who realizes the influences of these factors and can use them to help you. A good mortgage counselor will find the right mortgage strategy for you and then get the best lender to implement that strategy for you at the most advantageous rate available - taux hypothecaire.