What Causes Mortgage Rates to Go Up and Down?
Introduction
Mortgage rates are a critical factor in the home buying process. They can significantly impact the total cost of a home over time. But what causes these rates to fluctuate? One common question we often hear is, why do rates change? This article will examine the factors that cause mortgage rates to go up and down.
The Role of The Economy
The overall health of the economy plays a significant role in determining mortgage rates. When the economy is strong, people are more likely to buy homes, which can drive up mortgage rates. Conversely, during economic downturns, mortgage rates often decrease to stimulate home buying.
However, there are instances where the economy is not weak, but the rates are low. This can be attributed to several factors, including government policy and global economic trends. For example, during the recent global health crisis, many economies around the world were not necessarily weak, but central banks lowered interest rates to unprecedented levels to stimulate economic activity and prevent a financial crisis. This resulted in historically low mortgage rates.
In Canada, for instance, despite a strong housing market, the Bank of Canada kept its key interest rate at a record low to support the economy during these challenging times. This had a direct impact on variable mortgage rates and an indirect impact on fixed mortgage rates, keeping them low despite a strong demand for homes.
Therefore, a strong economy does not always equate to high mortgage rates, and vice versa.
Inflation
Inflation is the rate at which the general level of prices for goods and services is rising. Central banks attempt to limit inflation, and avoid deflation, to keep the economy running smoothly. If inflation is expected to rise, mortgage rates will often follow, as lenders need to make a profit above the inflation rate.
Economic Growth Indicators
Indicators such as the Gross Domestic Product (GDP), employment data, manufacturing strength and consumer spending reports, can influence mortgage rates. Strong economic growth leads to higher mortgage rates, while weak growth can lead to lower rates.
The Impact of Government Policies
Government decisions can impact mortgage rates. Central banks, like the Bank of Canada, influence mortgage rates through their control of short-term interest rates. They raise rates to curb inflation and lower them to stimulate economic growth.
Monetary Policy
The monetary policy enacted by the Bank of Canada directly affects short-term interest rates. These short-term rates, in turn, influence long-term interest rates like mortgages.
Government-Backed Securities
The government sells bonds and other securities to help fund its operations. Mortgage rates can be affected by the yield on these government-backed securities.
Global Market Influences
Canada’s mortgage market does not operate in isolation. Global economic events and trends can influence Canadian mortgage rates.
Global Economic Health
The economic health of major global players can influence mortgage rates. For instance, if major economies like the U.S. or China experience economic downturns, it can lead to lower mortgage rates in Canada.
Foreign Investment
Foreign investment in Canada can also impact mortgage rates. If Canada is seen as a safe place to invest, foreign money can flow into the country, driving down mortgage rates.
Fixed and Variable Mortgage Rates
Fixed and variable mortgage rates are influenced by different factors.
Fixed Mortgage Rates
Fixed mortgage rates are determined primarily by the bond market. When bond yields are high, fixed rates are also high. When bond yields fall, fixed rates also fall.
Variable Mortgage Rates
Variable mortgage rates, on the other hand, are influenced by the Bank of Canada’s policy interest rate. When the Bank of Canada raises its key interest rate, variable mortgage rates also rise. When the Bank of Canada lowers its key interest rate, variable mortgage rates also fall.
Conclusion
Mortgage rates are influenced by a variety of factors, from the health of the economy to government policies and global events. Understanding these can help homebuyers and homeowners navigate the complex landscape of mortgage rates and plan for the future. For more information on how these factors may impact your mortgage, consider speaking with a mortgage professional at TheBroker.ca Ltd.
