Not boring information about how mortgage rates are set. Really

MortgageHow are fixed-rate mortgages set? How about variable rate? Which is best for me?

Many people (like me) are on a variable (floating) rate mortgage and are wondering if (or when) to lock in to a fixed-rate mortgage. “Soon” would probably be a good answer, but that answer has been correct for a couple of years as rates have remained historically low. Our finance minister has said he is finished with tinkering with the rules around mortgages, however the CMHC may get dismantled or privatized.

That aside, if you’re like me, you know that in the long-run variable-rate mortgages are always cheaper than fixed-rate mortgages so you should really be asking yourself, “How much risk am I willing to bear?”

That’s a question for you and for me but not for us. It’s an individual choice. It’s always a good idea to check in with your banker or investment guy. They live the life and should be able to steer you right.

Today I’m writing about mortgages.

Do you know how mortgage rates are determined? Do you know why the prime rate is important? Here’s the answer:

Variable-rate mortgages are linked directly to the prime rate. The prime rate is set by the Bank of Canada. The Bank of Canada controls our monetary policy, which controls the supply of money available in the economy and thus helps control the economy.

Makes sense, right?

Pricing for fixed-rate mortgages, by contrast is a little trickier. Fixed-rate mortgages are priced in relation to the bond markets. For investors, bonds are the main competing investment to mortgages. Bonds are simpler investments in terms of fees and risks, so mortgages generally are priced 1%-2% higher. There is more going on with this kind of investment, so discounts off the posted rates are (almost) always available.

Either way, mortgages are negotiable. Shop around.

Which reminds me, if you have mortgage, your bank will send you out a renewal about six months before your five year term is up. Many people just sign the form and send it back in. Big mistake. That rate is negotiable. Just like when you threaten to leave your internet or telephone provider – suddenly there are discounts available.

Last word on mortgages

My friend Colin likes to say that mort is French for death and gage sounds like gauge, a measuring device. That means a mortgage is just a way to measure your time till death. Clever. Colin doesn’t own a house. He’s been renting the same house since the mid 90’s. Not so clever.

Leave a Reply

Your email address will not be published. Required fields are marked *