Did you know that the Bank of Canada’s Rate announcements don’t have any impact on the fixed rates at all? I get several inquiries a day and there is a consensus that they do. For instance, a new home buyer might suggest waiting to purchase a home as there has been a lot of talk around future decreases by the Bank of Canada, yet they are interested in a fixed rate mortgage. Let me explain.
Variable Rates move with the Bank of Canada’s
overnight lending rate. For instance, if
the Bank of Canada decides to reduce the overnight lending rate by 0.25%, then
the lenders will adjust their Prime Lending Rate by reducing it by the same
0.25%. The only metric manipulated by
the lender is the spread between Prime Lending Rate and the rate offered by the
lender. So, if a lenders prime is 6.95%,
the lender might offer a rate of Prime Minus 1.00%, which leads to a rate of
5.95%. That same rate of 5.95% will move
with the prime rate. If the Prime Rate
moves, then so does the rate accordingly.
The lender’s Prime Lending Rate also has the same effect on a Home
Equity Line of Credit. Lender’s can
adjust their rate spread anytime, but it would have no affect on a mortgage
already in place.
Fixed Rates typically follow the trends of Canada
Bond Yields. So, this would be a good
metric to follow when determining where fixed will rates will go. If Bond Yields trend upward, you can expect
the fixed rates to do the same. The same
goes if Bond Yields trend downward, you can expect the fixed rates to do the
same. While it is not a perfect science,
it is about the best metric you can you use to see where these rates are
going. Fixed rates also depend on a
lender’s appetite for mortgage business. Another determining factor is inflation, as
inflation numbers go up, Bond Yields tend to follow and the same goes for
decreases.
In conclusion, the Bank of Canada’s rate announcements do
not have any effect on Fixed Rates, they only effect Variable Rates. Rates can be complicated, you should contact
a broker, myself for assistance as to what might be best for your
situation. I can help you navigate this
complicated space so you can make an informed decision.
