What affects mortgage rates?

What affects mortgage rates?
Government policies to protect the economy during the pandemic resulted in exceptionally low mortgage rates for both fixed- and variable-rate mortgages. As we start moving towards recovery, fixed rates have started to edge upwards. The prime rate, which variable rates are based on, has not increased. So why did fixed go up but not variable? Let's look at the mechanics of both.

How are variable rates set?
The chartered banks set the prime lending rate (the rate they offer their best customers). They base their decisions on the Bank of Canada's overnight rate because that's the rate that influences their own borrowing. There are approximately eight times a year the Bank of Canada makes rate announcements. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate, with most lenders currently offering variables at prime minus a certain percentage. The Bank of Canada in their most recent announcement did not increase the overnight rate and did not mention when they foresee the need to increase rates.

How are fixed rates set?
Fixed-rate mortgages are a little different. Banks predominantly use Government of Canada bonds to raise money for fixed-rate mortgages. In the bond market, interest rates can fluctuate more often since they're subject to the changing moods of traders and bond investors as they try to figure out how fast the economy will grow and where inflation is headed. That's why you watch the bond market for clues on where fixed mortgage rates will go next. Recently the yield for 5-year government bonds went up, causing fixed mortgage rates to follow suit.

Why are there so many different mortgage rates?
Fixed and variable are not the only factors affecting rates. There are rate premiums for certain situations i.e., rental properties, 30-year amortizations. There are different rates for insured, insurable and uninsured mortgages. Rock-bottom online rates often come with restrictions and high penalties. The rate you qualify for can be very different from what your neighbor got. That's why it is so important to get in touch for unbiased professional advice when you need to determine the best mortgage and rate applicable to your situation, whether it's for a purchase, renewal, or refinance. Knowledge is power! This chart clearly shows just how low rates are on a historical basis.

Note: My 5-year fixed rates are typically in the range of 1.5% above the 5-year bond, significantly lower than Bank posted rates. The stress test, introduced in 2016, is based on the Bank posted 5-year rate.