General Knowledge

Stay Ahead of the Curve: Forecasting Mortgage Rate Shifts

By December 13, 2023 No Comments
Stay Ahead of the Curve: Forecasting Mortgage Rate Shifts
Stay Ahead of the Curve: Forecasting Mortgage Rate Shifts

Anticipating long-term mortgage rates and interest trends requires a deep understanding of the estimation techniques based on complex economic factors

Predicting short-term trends is notably more convenient than other forecasting methods due to its reduced demand for technical expertise and cognitive effort. An essential element of predicting mortgage rates is being familiar with what these rates are following or what elements are causing movements in the rates. The current prime lending rate set by the Bank of Canada stands at 7.2%. Changes in global rates have been shaking up bonds and stocks lately. The US Federal Reserve hinted at raising rates again this year, which might keep borrowing expenses high until 2024 or 2025. The economy in Canada is more sensitive to these rate shifts than the US. That’s because Canada’s mortgage system works a bit differently. Let us explore the essential factors that influence mortgage interest rates.

What’s behind your mortgage rate

  • Lenders’ Costs: Banks and mortgage lenders don’t just offer free money. They get the money they lend from various sources like depositors and investors, and each of these sources has a cost as they do it to earn returns on their investment from depositors to investors. These costs can include the interest rates banks pay when they borrow money from other institutions and depositors or the cost of maintaining reserves set by regulators. All these expenses influence the interest rates they charge you for your mortgage. If their costs go up, they might charge you more; if costs go down, they might charge you less.
  • National Economy: How the country’s economy is doing matters a lot. When many people have jobs and earn good money, they’re more likely to buy houses. When many people want to buy, prices can go up. This situation might make lenders increase mortgage rates. Similarly, fewer people might buy homes if the economy is slow, so lenders offer lower rates to encourage borrowing and buying.
  • Global Economy: Money isn’t just about what’s happening at home. Events and changes worldwide can also affect your mortgage rate. For example, trade deals between countries or significant global events (like a major recession or a boom in another country) can impact the overall economy. These international matters also influence how much lenders charge you for your mortgage.
  • Bank of Canada’s Actions: The Bank of Canada, our country’s central bank, plays a massive role in setting the stage for interest rates. They make decisions about the ‘official’ interest rate. When they raise this rate, it becomes more expensive for banks to borrow money, so they might increase the rates they charge you for mortgages. When the Bank of Canada lowers the rate, it can become cheaper for banks to borrow money, potentially leading to lower mortgage rates for borrowers.
    Your Money Story: Lenders want to know if you’re a safe bet to lend money to. Your financial story matters here. Things like your credit score (which shows how good you are at paying back loans), your work history (indicating how stable your income is), and your past loans (whether you’ve paid them on time) help lenders understand the risk of lending to you. They might offer you lower rates if you’ve got a good history. If your history is shaky, they might charge you more because lending to you could be riskier.

Effects on the interest rates:
Fixed mortgage rate predictions: Fixed mortgage rates are linked to government bond yields. When banks issue bonds to fund mortgages, these rates closely mirror government bond yields, with a slight ‘spread’ factored in for additional risk. Banks issue bonds, essentially borrowing funds from bond buyers, much like stocks. At the bond’s maturity, they repay the borrowed amount and interest. Subsequently, these borrowed funds are lent to mortgage borrowers at a higher interest rate. This serves two purposes: to generate profit for the banks and to compensate for the risk associated with average homebuyers compared to Canadian banks. Fixed-rate mortgages are typically priced 1 to 2% higher than bond yields. For instance, if a bank issues bonds at a 2% interest rate, it might offer 3.5% mortgages, creating a 1.5% ‘spread.’ This margin represents the bank’s profit beyond the borrowing cost. Banks receive compensation for lending money at a higher rate than what they borrowed it for.

Canadian Government bond yields(benchmark)

04/12/2023 05/12/2023 06/12/2023
Two-year bonds 4.12 4.07 4.07
Three-year bonds 3.95 3.89 3.89
Five-year bonds 3.54 3.44 3.40
Seven-year bonds 3.48 3.38 3.33
Ten-year bonds 3.46 3.34 3.30
Long term bonds 3.26 3.16 3.11

Variable mortgage rate predictions: Variable mortgage rates involve paying close attention to the Bank of Canada’s actions. While both fixed and variable rates hinge on economic factors, the Bank of Canada’s influence on the prime lending rate makes predictions about variable rates comparatively more manageable. When the Bank of Canada unveils its interest rate announcements, it’s often followed by reports indicating the potential direction of rates. These reports act as a heads-up, signalling whether a rate hike or cut might be on the horizon. Most financial institutions generally keep their prime rate at a minimum difference of +2.2% from the actual policy rate for Variable-rate mortgages. The Bank of Canada’s official website publishes various reports offering insights into the potential trajectory of variable rates, providing a valuable resource to stay updated. Canadian banks frequently compile reports aiming to forecast the Bank of Canada’s rate movements. These well-documented reports offer insights into the expectations of industry experts. Accessing these reports from major Canadian banks can provide a comprehensive view of anticipated rate shifts.

Which mortgage rate type, fixed or variable, offers more significant savings?

Data and research based on several studies suggest that choosing a variable-rate mortgage has saved Canadian homeowners more money than fixed rates. Over many years, about 90.1% of the time, people saved on interest by going with variable rates. On average, this decision meant about $20,630 in savings over 15 years for every $100,000 borrowed. However, the market is acting strangely right now. Because of this uncertainty, it’s wise to talk to a financial expert before deciding.

 An Essential Fact:

Locking in mortgage rates: If you’re gearing up to buy a house soon or considering refinancing, locking in your mortgage rate can bring peace of mind. How? You can get ‘pre-approved’ from a lender or broker. This means you secure a rate for a set time, no matter what else happens in the market. Many lenders and brokers even offer rate guarantees for up to 120 days. So, talk to them and ensure you’re covered before things change!

The Bottom Line

Even the slightest changes in the interest rate make a huge difference, making it essential to better understand the metrics affecting it. Combining the study of past data, knowing economic signs, and using the prediction tools helps you predict rate changes better. It’s like having a map for these ups and downs. Stay curious about new financial announcements, keep an eye on global money shifts, and consider all the factors at play. With this approach, you’re ready to not just guess but adapt smartly to how rates move, securing your finances more confidently

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