Before committing to buying a home, it’s important to understand the basics. This is true when it comes to your home’s mortgage: the types of mortgages, how they will affect you financially, and yes, even why mortgage rates go up and down over time. Knowing the ‘why’ of mortgage rate fluctuate will allow you to see the signs of when a potential rate-hike is coming. This allows you to plan ahead and brace yourself for the potential fallout (you’re also being a responsible, future homeowner). Below is a quick guide on how and why mortgage rates fluctuate.

Fixed mortgages

When bond yields move, so too do fixed mortgage rates

When bond yields rise, so too do fixed rates (and vice-versa). This is due to the activity of bond prices; when bond prices decrease, bond yields increase causing fixed rates to rise (again, this also happens vice-versa). Bonds – especially government bonds – play a central role in the rise and fall of fixed mortgage rates because they’re considered one of the safest investments one can make – especially more so than stocks.

If you have or will have a fixed mortgage rate and want to see what’s possibly on the horizon, keep your eye on the Canadian government’s bond yield activity. It’s a lot to take in, but don’t sweat it. Just remember: when the bond yield moves upward or downward, fixed mortgage rates typically follow suit.


Variable mortgages

Overnight rate determines prime rate

You see, Bank of Canada changes the variable mortgage rates because these will determine the overnight lending rate. This in turn directly impacts the total cost of borrowing and lending short-term funds; this influences the prime rate which impacts variable mortgage rates. Thus, when prime rates increase, so too will variable mortgage rates. As you can see, it’s a systematic chain of commands that fall like dominoes; when one factor acts, they all react.

The stock market

When the stock market is in the pits, mortgage interest rates are low; when it’s hot, it’s not. Simple enough, but why does this happen? Well, when the stock market is booming, the demand for bonds decreases. This is because investors are on track to earning more on their stock investments than bond investments. Harken back to when stated earlier that bonds are considered a safe investment. While safe, they’re not going to give you your maximum return on investment (ROI) overnight.

The stock market is a completely different beast – and if you’ve even remotely paid attention to the news this year, you already know that decisions can send it soaring or into a tailspin. When the stock market soars, investors see increased, instant earnings that they would never get with a bond. The caveat is that there are no guarantees with stock investment; as easily as a stock soars, theoretically it can just as easily tank. Thus, when it’s healthy (bull market), most investors are not interested in bonds. When investing in stocks seems risky (bear market), bonds are a more appropriate investment.

Remember: when the stock market is healthy, your mortgage rate is going to rise; when it isn’t, it falls.

Want to know even more about what dictates your mortgage rates? Give me a call today and let’s clear up any questions you may have before inquiring about a mortgage of your very own!