Today I’m here to talk about interest rates and what makes them move up or down. So you might have noticed that the fixed mortgage rates recently have been going up and down like crazy while the variable rates have just stayed the same, no big change since the beginning of the year. Many of you might be thinking what’s the difference? Aren’t all interest rates at an all-time low, so they should all be heading upwards? On the other hand why aren’t the fixed and variable rates going up and down at the same time? Why is one so volatile and the other reasonably steady?
So we’ll discuss the difference between the two and where to find information regarding this. Fixed mortgage rates are actually based on what the bond market does. So if you think about a 5 year bond, if you invest in that, whatever that rate does, whether it goes up or down the 5 year fixed mortgage rate will follow. This also contributes to the volatility of the rate, since bond rates can change ever single day depending on what people want to invest in. For example if people feel like investing in anything else is insecure they’ll invest in bonds, therefore driving up bond rates and your 5 year mortgage rates will follow. This is applicable for all the varieties of bonds and corresponding mortgage rates on the market and all the individual changes will influence the 1-5 year mortgage rates.
Now the variable rate on the other hand is not based on the bonds at all, it’s actually based on the “Prime Lending Rate”. Each individual bank and lender will set their Prime Lending Rate (Basic Rate), they don’t just pick this number out of a hat, and they are actually based on what the Bank of Canada sets as their Prime Lending Rate. Now this means that the Bank of Canada is free to change this rate up and down, however they have the entire economy to think of, so they have goals of improving the economy and in addition any changes they make may impact the economy negatively, so they have to be very conscious of any changes that they make. Therefore the Prime Lending Rate is consistent and they’re thought out before anything happens. Usually there are a lot of indicators of when it will or will not change months before it does happen.
So if that’s of interest to you or if you want to know where to see the graphs and charts for each of these please feel free to contact us and we’ll be more than happy to help you out!