Mortgage Rate Cut
The Truth About Mortgage Rates
The best rumor has the longest endurance and untruths about the connection between the Bank of Canada interest rate cuts and interest the mortgage is a good example. Why? Well, Bank of Canada interest rate cuts have an impact on the financial sector, they do not affect all segments of the financial sector, some segments are directly affected, others are only indirectly place, and then segments that are directly or indirectly dependent on the financial product. The mortgage industry fall into this third category.
Shocked? Well, you're probably not alone. The idea that the Bank of Canada discount rate changes cause the interest on mortgage to change is a widespread misconception that has been pursued for years. So let us put the record straight!
TRUTH: When the Bank of Canada adjusts interest rates, it affects interest rates of financial products. However, only the interest on short-term financial products-things like car loans, credit cards, etc.-is directly affected by the Bank of Canada interest rate cuts or hikes. In the meantime, 10, 15, 30 and 40-year fixed mortgage is considered long-term financial products. As such, Bank of Canada's decisions do not directly affect fixed mortgage rates.
TRUTH: Although the Bank of Canada interest rate cuts have no direct impact on fixed mortgage rates, the Bank of Canada decisions make direct domination one type of home loans: Adjustable rate Mortgages (ARM), also sometimes referred to as variable rate mortgages, whose ARM is specifically designed to be tied to the prime rate.
TRUTH: Fixed mortgage rates are based on mortgage bonds (sometimes called mortgage securities), NOT the 10-year T-bill. Therefore what is actually a direct effect on a mortgage rate increase or decrease the purchase and sale of mortgage bonds.
TRUTH: Although the Bank of Canada rate changes do not directly affect fixed mortgage rates, they can have a domino effect on fixed mortgage rates. How so? Well, the purpose of the Bank of Canada's exchange rate adjustments are often increase or decrease consumption. For example, when interest rates are cut goal is to increase consumption. As a result, wonder investors that the Bank of Canada's tactics will work pulling their money out of the bond market (which is less volatile, low-return investments) and put their money in shares because they believe that they can make higher returns on their investments. When this happens, which may cause mortgage rates fluctuate. Remember: Mortgage Bonds / Mortgage securities influence mortgage rates. If money is paid out from the mortgage bonds will rise. Conversely, if there is money left from other types of bonds can mortgage rates dip or they may remain unchanged.
So what does all this mean, if you wish to modify or refinance your mortgage or if you are waiting for mortgage rates to change before you apply for a mortgage? The first means that you should keep an ear out for what the Bank of Canada makes with respect to interest rate cuts and spikes ONLY if you are interested in a variable rate mortgage, which would not be ideal for most consumers in the current economy. But if you prefer a fixed rate mortgage, it means that you can (and should) stop wasting your time tracking the 10-year T-bill and keep track of the Bank of Canada. Instead the watch what happens to mortgage bonds, so you know when mortgage rates are where you want them!
About the Author
Mauricio Navarro is the writer and adviser to MortgageRatesInCanada.ca – a comparison website for Canadian mortgage rates. Also, Mauricio is involved as an investor in CompareMortgageQuotes.ca – a website to compare mortgage rates & receive instant mortgage quotes.