Tag Archive for: Mortgage Rates

Understanding Mortgage Rates: A Homeowner’s Guide

Ever wonder why mortgage rates change and how they’re determined? Let’s break down the complex world of mortgage rates into simple, digestible pieces that will help you make informed decisions about your mortgage.

The Building Blocks: Key Interest Rates

Think of Canada’s interest rate system like a multi-story building:

  • The foundation is the Bank of Canada’s overnight rate
  • The ground floor is the banks’ prime rate
  • The upper floors are the actual mortgage rates you’ll be offered

The Foundation: Overnight Rate

This is the Bank of Canada’s baseline rate – think of it as the wholesale price of money. It’s the rate banks use when lending money to each other for very short periods (overnight, hence the name).

The Ground Floor: Prime Rate

The prime rate sits about 2.20 percentage points above the overnight rate. While each bank technically sets its own prime rate, they move in lockstep – when one bank changes its rate, others typically follow within hours.

Real World Example:

  • Current overnight rate: 3.25% (as of January 2025)
  • Current prime rate: 5.45%
  • The difference (2.20%) is called the “spread”

Note: The next Bank of Canada rate announcement is scheduled in 8 days – this could affect these rates.

Think of this spread like a store’s markup on wholesale products – it helps cover the bank’s costs and profits.

Variable vs. Fixed Rates: Two Different Stories

Variable Rate Mortgages: Following Prime

Variable rates are like being on an escalator – they move up or down with the prime rate. They’re usually expressed as “prime plus/minus X%”

Example Scenarios:

  • “Prime – 1%” = 4.45% (based on current 5.45% prime)
  • “Prime + 0.5%” = 5.95%

If you choose a variable rate, you’ll need to watch Bank of Canada announcements. These happen eight times per year and can affect your mortgage payments within days.

Fixed Rate Mortgages: Following Bonds

Fixed rates are more like taking the stairs – they’re stable once you’re on them, but the next set of stairs might be higher or lower when your term ends.

Fixed rates follow Government of Canada bond yields:

  • 5-year fixed mortgages follow 5-year bond yields
  • 3-year fixed follows 3-year bonds And so on…

Example: If the 5-year government bond yield is 3.5%, banks might offer 5-year fixed mortgages at around 5.5% (a 2% spread).

Understanding Spreads: The Bank’s Cushion

Think of spreads like shock absorbers in a car – they help smooth out the bumps in the financial road. Banks use these spreads to:

  • Cover their operating costs
  • Protect against potential loan defaults
  • Maintain profit margins
  • Handle unexpected market changes

Positive vs. Negative Spreads

Most of the time, banks maintain positive spreads (they charge more than their cost of funds). However, sometimes you might see what appears to be a negative spread, like an ultra-low promotional rate. Banks do this to:

  • Attract new customers
  • Build market share
  • Sell other profitable products (like credit cards or investments)

What This Means for Your Mortgage

If You Choose a Variable Rate:

  • Watch Bank of Canada announcements
  • Understand your tolerance for payment changes
  • Know your conversion options to fixed rates

If You Choose a Fixed Rate:

  • Monitor bond yields when approaching renewal
  • Understand rate hold periods
  • Consider the timing of your purchase or renewal

Market Monitoring Tips

For Variable Rates:

  • Mark Bank of Canada meeting dates on your calendar
  • Watch for prime rate announcements from major banks
  • Follow economic news that might influence Bank of Canada decisions

For Fixed Rates:

  • Track Government of Canada bond yields
  • Watch for changes in bank fixed rate offerings
  • Monitor economic indicators that affect bond markets

The Bottom Line

Understanding these relationships helps you:

  • Make informed decisions about rate choices
  • Anticipate rate changes
  • Understand market movements
  • Time your purchase or renewal more effectively

Remember: While variable rates offer transparency (they move with prime), fixed rates provide certainty (they’re stable for the term). Neither is inherently better – it depends on your specific situation, risk tolerance, and financial goals.


Note: All rates mentioned in examples are for illustration purposes and may not reflect current market rates and should not be entirely relied upon to make decisions. Always verify current rates with lenders.

– Kai T.

Rate Cuts, Inflation, and Mortgages: A Balancing Act of Economic Forces

Look closely at bond yields after next week’s Bank of Canada rate announcement; they’re the unsung GPS guiding fixed-rate mortgages. As Canadians prepare for potential rate cuts, the financial world shifts beneath their feet, yet few understand how these cuts ripple through the broader economy. With two-thirds of economists predicting a 50-basis-point chop in the Bank of Canada’s rates, it’s time we explored the deeper implications.

Bond yields act as a canary in the coal mine for mortgage shoppers. Fixed mortgage rates are tethered to them like a ship to its anchor. When yields fall, mortgage rates tend to follow, but as any seasoned observer knows, the bond market is not a passive reactor—it anticipates. The mere whisper of rate cuts sends ripples through the market, sparking a dance between inflation, yields, and mortgage rates.

At first glance, it’s tempting to assume bond yields will simply drop along with rates. However, markets often bake in expectations before the fact, betting that looser monetary policy will heat up the economy, dragging inflation with it. This counterintuitive bounce means yields, and therefore mortgage rates, might bottom out before eventually rising. It’s a waiting game, not for the faint of heart.

Right now, inflation is playing the role of the reluctant guest, refusing to rise to the occasion. The Bank of Canada, seeing this, might be cutting rates to avoid an economic spiral, but therein lies the rub—cut too much, and we might soon be staring down the barrel of overheated inflation. Bond traders, however, are calling the Bank’s bluff. They’re expecting 100 basis points of cuts by January, slicing the overnight rate back to 3.25%, the theoretical “neutral” zone where the economy neither speeds up nor slows down. Yet, theory is one thing; reality is another.

When the overnight rate hovers between 2.25% and 3.25%, it’s supposed to create a Goldilocks moment—just right for economic growth. But here’s the kicker: central bankers rarely get it just right. Often, they slash too deeply, worried inflation will drag the economy into a deflationary mire. So, when that neutral 2.75% midpoint comes into view, the Bank of Canada may take a breather, delaying further cuts.

And what about those bond yields? They will eventually reach their own rock bottom, with a potential political wildcard thrown into the mix. If Trump reclaims the U.S. presidency this November, his fiscal policies could inject a jolt into U.S. inflation, sending ripples across the border to Canada. Inflation doesn’t need a passport, after all.

Here’s where the rubber meets the road: a 50-basis-point rate cut will have a profound impact on floating-rate borrowers. With the average Canadian mortgage sitting at roughly $300,000, many will find themselves pocketing an extra $80 to $120 monthly. It’s not just a windfall; it’s a potential catalyst for more spending. And as every economist knows, spending begets more spending. Those extra dollars might start circulating through the economy, whether on paying down debt, covering rising costs of essentials, or indulging in discretionary purchases. That surge in consumer spending could, ironically, push inflation higher—precisely what the Bank of Canada is trying to avoid.

Additionally, with lower rates, homebuyers will find themselves in a psychological tug-of-war. The moment rates drop, there’s a rush to get in before prices rise again. We’ve been here before—commentators have sung this tune since June, when the first cuts rolled out. The reality is that lower rates don’t just lower monthly payments; they make mortgages more accessible, especially if the government’s minimum qualifying rate follows suit. Still, it’s a psychological game as much as an economic one.

Let’s zoom out and examine how a 50-basis-point cut reshapes the mortgage landscape. A new floating-rate mortgage will see interest rates fall from 5.60% to 5.10%, a seemingly modest drop, but one that offers a tangible benefit. It cuts monthly payments by about $30 per $100,000 borrowed. More crucially, it lowers the income required to qualify for such a mortgage. For a $500,000 mortgage, a well-qualified borrower would need about $5,000 less in annual income. The dream of homeownership moves a step closer for many Canadians.

However, there are always consequences in the world of monetary policy. As the loonie—the ever-sensitive Canadian dollar—responds to this interest rate dance, we may see it drop further, making everything from vacations to imported goods more expensive. It’s a potential double-edged sword: while consumers get a break on mortgage payments, they pay more for just about everything else.

On the other hand, inflation may very well remain dormant. But if it creeps back up in the coming months, there will undoubtedly be rumblings that the Bank of Canada overcorrected. Critics are already forming ranks, with some arguing that the central bank’s cuts may have gone too far. If inflation stays within a manageable range, the rate-cutting cycle could stall, leaving the economy in a delicate balance between low growth and steady inflation.

This is not just theory, though. Real estate sales are already ticking up slightly, and sellers are listing properties at a pace we haven’t seen in two years. The uptick in supply is, for now, a welcome relief for buyers starved of choice. But with new inventory flowing in, especially in places like Toronto’s condo market, prices are under pressure. Toronto’s condo benchmark price took a 1.3% hit from August to September alone, the sharpest drop since February. Single-detached homes, though more insulated, aren’t immune to these shifts.

As we look toward the months ahead, all eyes remain on interest rates and inventory levels. For now, the rate cuts are a double-edged sword, offering relief to some while casting doubt over long-term economic stability. One thing is certain: the mortgage and housing markets remain inextricably tied to bond yields and the whims of central banks.

– Kai T.