The 5 Basics of Mortgage Rates

October 16, 2018 0

Your mortgage rate is the rate of interest that you’ll be charged by your mortgage lender to pay back the purchase of your home.

Homebuyers and homeowners need to watch the mortgage rates because mortgage loans last for a long period of time, and mortgage rates change over time. The subject of mortgage rates is fairly complex, but important.

1. How are mortgage rates determined?

Firstly, it’s important to know that there are two types of mortgage loans: fixed and variable. The rates for these loans are not based on the same factors.

Fixed-rate mortgages are influenced by the bond market. Essentially, the interest the banks are receiving from bond investments determines the interest rates on fixed mortgages. The more money they are making in interest, the less they can afford to charge on mortgages, and vice versa.

Meanwhile, the mortgage rate on a variable mortgage is determined by the prime rates which are based off of rates set by the Bank of Canada. If the prime goes up, the interest rate will go up, and will vary as per the overnight rates.

2. How do you choose a mortgage rate type?

Fixed or variable? How do you choose? Fixed rate mortgages retain the same mortgage rate for the duration of the loan. Although there often is the possibility to refinance, a fixed rate basically means just that. The good news is that if mortgage rates go up, a fixed mortgage will not change. Alternatively, if the rates go down, you’ll be stuck with that higher rate until you can refinance.

Variable rates change to reflect the current interest rates. They are the preferred option when it is expected that the interest rates are going to go down. It allows homeowners to be free from a high fixed loan rate.

3. Should you hire a mortgage broker?

It is not a necessity, however mortgage brokers can help you find the best mortgage rate, and quickly, without you having to spend a lot of time researching different mortgage lenders. Although, if you are comfortable going it on your own, you may want to skip out on the mortgage broker. Sometimes they may not actually find you the best rate, or they may be in it for themselves, not for you. Neither choice is necessarily better than the other, it all depends on your comfort of going the market alone, or entrusting someone else to help you out.

4. What benefits come from refinancing?

Refinancing does not just have to be to take advantage of a lower interest rate, although it certainly can be used for that purpose. Another reason people refinance is to access the equity on their home. That equity can be used to pay for major financial requirements like home renovations or post-secondary education. Homeowners may also want to refinance their loans in order to consolidate other kinds of debt. They can add their debt onto the mortgage loan, and only have to make one payment, instead of a bunch, every month.

5. What is a prepayment penalty?

A fixed mortgage is meant to be just that, so you can actually be penalized for trying to pay more onto your mortgage loan each month, or for putting a big lump sum onto the loan. However, there are some leniencies around that. In Canada, you will have some prepayment privileges. These will allow you to pay up to a certain percent extra each month on your loan, or make a lump payment of up to a certain amount before you get charged. These privileges vary depending on the vendor, but will be laid out in the terms and conditions of the mortgage contract.