The subject of interest rate movements is a complicated and convoluted one involving the monetary policy of the Bank of Canada and the analysis of the bond markets that can (and has) fill hundreds of books. Let's try to keep it simple here - hypotheque.

A borrower may think that it is the bank that controls what his interest rate on his home loan will be. The bank is really only reacting to the influences in the economic arena that determine mortgage interest rates:

-Variable rates are determined by the prime rate - pret hypothecaire.

-Fixed rates are determined by the bond market.

The base rate is the rate the bank of Canada charges banks, and it dictates the prime rate that the major banks of Canada will set and this in turn will determine the variable rate on mortgages.

VARIABLE RATES:

Most people only consider the variable rate. They are happy when they feel they can get a 5 year variable home loan at 4.75%, when the 5 year fixed mortgage rate is 5.4%. This is short sighted, since variable rate mortgages go up and down with the prime rate. If the prime rate is, for example, 5.5%, the borrower with the 4.75% rate actually has a rate which is prime less .75%. When the prime rate increases, his variable mortgage rate will go up with it - hypotheque.

The prime rate is established at fixed intervals eight times per year. This is when the Bank of Canada fixes a new rate that may increase, decrease or remain the same in relation to the old one. It stays at this new level until the next adjustment period.

The prime rate is used by the Bank of Canada to control growth and inflation. The consumer price index (CPI) and the gross domestic product (GDP) are the benchmarks that BOC uses to determine the prime rate. (hypotheque)

If the CPI is increasing too fast, the Bank of Canada will want to slow inflation by increasing the prime rate to slow things down. The GDP indicates the growth of business activity in the country and if it is growing fast it too will influence inflation.

A weak economy with low inflation will usually push the Bank of Canada to lower rates; a strong economy and higher inflation rates will induce it to raise rates. (taux hypothecaire)

FIXED RATES:

Fixed rates are fixed by each lender and are also determined by many factors, the most critical of which are the lender's portfolio earnings and its cost of funds.

Banks and other mortgage lenders buy and sell the mortgages in their portfolios in a secondary market. They try to keep their portfolios balanced and also to increase the return on them

The investors the banks sell these mortgages to also invest in the bond market, so the secondary mortgage market has to keep up with the bond market. If the rates in the bond market go up, the banks will have to offer increased rates on their mortgage portfolios by increasing the rates on the mortgages they write. When the rates on the bond markets decrease, the fixed mortgage rates can come down to be in line with them. (pret hypothecaire)

Now you understand that the interest rate you will pay on your mortgage is determined by decisions made by banks, lenders and investors in the bond markets, the Bank of Canada, the CPI and the GDP. It is all linked in a complex structure that takes a lot of analysis by experts - taux hypothecaire.

What can an average consumer do? The best solution is to work hand in hand with a qualified mortgage counselor who understands all of the implications of these factors and how they will have an impact on your unique borrowing requirements. Only an accredited mortgage broker is able to explain these interest rate (as well as other) issues and determine what your strategy should be. (taux hypothecaire)