Factors That Affect Canadian Mortgages
Canadian mortgage rates are constantly changing. Why? We often get asked to predict the future of mortgage rates, and that’s essentially what it would be: predicting the future - which we unfortunately can’t. The factors that influence the fluctuation of mortgage rates, themselves have a number of factors influencing them, making them very hard to predict. Although, by knowing what factors affect mortgage rates, we can more accurately predict what the mortgage market may be doing.
1) Inflation
Obviously, but quite possibly not in the way you might think. Inflation rates and mortgage rates are inversely related. This means that as:
Interest rates decrease, inflation is most likely increasing.
Interest rates increase, inflation is likely to decline.
As interest rates rise, populations are less likely to borrow money and increase their saving tendencies. In turn, this results in slowing inflation rates due to a decrease in product consumption.
The Bank of Canada has an annual Consumer Price Index (CPI) target of 2%. Consider a 2% inflation rate, and a mortgage rate of 5%. The lender from which you borrowed money, will realistically be making a return of only 3%. This shows that as the CPI increases, mortgage rates will also increase so lenders keep their expected yield.
2) Rate of Economic Growth
In particular, healthy Canadian employment rates and Gross Domestic Production (GDP) means more spending. More Canadians will be looking toward home ownership due to increases in financial stability. With an influx in demand for mortgages, interest rates will rise considering lenders only have so much capital to lend. On the other hand, if employment rates and GDP rates are falling, lenders will be looking to spend their capital and will most likely lower interest rates to stimulate loans.
3) Canada’s Monetary Policy
The status of Canada’s Monetary Policy heavily influences mortgage rates because of its main purpose of stabilizing inflation. Currently inflation rates are above the 2% target, meaning Canada’s Monetary Policy will have measures in place to attempt to reduce inflation, resulting in increasing interest rates.
Although, policies take approximately 6-8 quarters to have an effect on the market making mortgage rates that much harder to predict - as most policies are based on judgements of the future status of the market and not today’s.
4) Bond Market
Bond prices are inversely related to interest rates. When rates go up, bond prices fall and vice-versa.
5) Housing Market Conditions
This may seem obvious, but let’s take a closer look.
When there is a decline in home purchasing (for various reasons), a decline in demand for mortgages means rates will fall.
When there is an increase in renting property rather than buying, rates will also lower.
Considering all of these factors, you may have noticed that they all have one thing common: consumer demand. As consumption rises/falls in one aspect, it affects the demand for mortgages and as the demand for mortgages fluctuates so do the interest rates.
While balancing work, family, health, and leisure, who has the time to continuously be monitoring all the factors in an attempt to possibly have an idea of what mortgage rates are going to do? Most people don’t.
So what should homeowners or prospective homeowners be doing? Getting in contact with a mortgage professional to have educated guidance on what mortgage plan would be best for their financial situation at a given point in time.