How is a Fixed Mortgage interest rate set in Canada?

Here is a quick rundown on how Fixed rates are set in Canada. Not an exciting read as per some of my other articles, but a free education is just that, free. If I put you to sleep I apologize ahead of time.

The Government of Canada, and all major nations, finance their activities and deficits, by issuing “bonds”. The interest rate paid on a new issues of these bonds depends upon the financial strategy of the Government in power. The accumulated outstanding amounts of these bond issues, past and present, is known as “the National Debt”. New issues are constantly required either to refinance maturing issues or finance current Government deficits. A bond is considered a “commodity” by the market and like any commodity in this great country of ours,it can go up or down. There are alot of external factors that I will not get into that affect the rising and falling of these. To give you an example, all you have to do is look around the world and what is happening in Japan, Libya, Syria, Brazil etc.

A new bond issue may set an interest rate at current market value, say $200 million at 5.8% for a 5-year bond. If this coincides with an economic or political event which drives down its value- for example, the unexpected Federal election here in Canada-  the effect on interest rates is immediate. The individual bond may fall in value, thus yielding a significantly higher return for the buyer at the lower price. This combined yield of interest and capital gains sets the new base market rate. Any Chartered bank (TDCT,RBC,BMO) seeking funds from these same investors will have to pay this yield plus a small premium to secure them.

Investors who buy and sell these Government bonds in large quantities, such as the Ontario Teachers pension fund, weigh many factors, including the currency value and economic prospects of Canada. They then determine what price they’ll pay for them. The price they’ll pay defines the base market rate for wholesale funds. Every day, trends in this rate are watched closely by all Financial Institutions and Mortgage Lenders (MCAP,First National,Street Capital) alike in order to be in a position to adjust their rates if required. IF you want to know when rates will rise, you can use this simple formula. If you take the 5 year Canadian bond and apply a basic 1.6 point spread to it, that is what the discounted rates should be. If there is less than the 1.6 spread for an extended period of time, rates are probably on the rise. This is just a loose rule of thumb and in no way a predictor of an actual rise. Just something my Father taught me when I was learning to become a Broker.

Canadian mortgage lenders are aware that their current depositors can choose to put their money into none of the financial institutions GIC’s, and instead buy other “fixed income securities” such as bonds, which yield a higher rate because they adjust immediately to market changes. They can even switch their funds into the stock market if this is performing relatively better.

In the truest sense of the word, the mortgage lending institutions are competing with other markets for the investor’s money. If a bank doesn’t attract enough depositors to fund mortgages, they’ll have to go where their depositors go - the money market - to make up the difference….and there, they pay the going rate!

All in all not a sexy read but very informing. There is alot more detail one could get into, but if you want the particulars give me a call or write me a note on any one of my social media sites.

Enjoy the sun today as one never knows when it will be back in April on the Wet Coast ;)

need immediate information regarding rates and mortgage info http://www.kevynoyhenart.ca/

Until tomorrow...

Kevyn