Factors Impacting Mortgage Rates | Michael Friedman

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A divergence of rate policies

You may be wondering what is going on with interest rates. The Bank of Canada has raised rates steadily over the past year, as has the US Federal Reserve and other G7 countries.

We started to see fixed rates drop just after the New Year, but in the past five weeks, we have seen an upward rebound in fixed rates. The upward rate movement was partly due to recent substantial job numbers out of the US and an upward swing in Canadian bonds, directly affecting fixed mortgage rates.

A Little Background

Both the Bank and Canada and the Canadian bond market are independent. The Bank of Canada affects floating rates such as HELOC, variable mortgage rates, credit card rates, and unsecured lines of credit, to name a few. The Canadian bond market affects fixed mortgage rates.

The decisions of central banks to raise or lower interest rates are based on a wide range of economic factors, including inflation, economic growth, employment rates, and international trade. While inflation is an essential consideration for central banks, it is not the only factor they consider when deciding interest rates

This morning February 21, 2023, Canadian inflation dropped slightly below estimates of 6.2% to 5.9%. One would think this would ease bonds, but that is not the case. When writing this blog, the 3-year CDN was 4.09%, up 3.40%(percentage up from the previous close) on the day.

If Canadian inflation falls while United States inflation continues to rise, the Bank of Canada may be less inclined to raise interest rates in the short term. Conversely, the Federal Reserve may be more willing to raise interest rates in the United States if inflation rises.

If this occurs, we could see a bit of a roller coaster ride. The effect of the US Fed raising rates and the Canadian central bank not doing so could have downward pressure on the Canadian dollar and possibly, at the same time, put pressure on the Canadian bond market due to inflation pressure on imported goods.

The question is what to do about a mortgage up for renewal or a mortgage for an upcoming purchase. There are some strategies that your mortgage broker can do by way of securing rates today and maneuvering into potentially lower rates before closing if the bond market goes in the right direction.

It’s essential to keep an eye on economic indicators and understand how they may impact interest rates in the future. However, if you find this complex and confusing,  I would encourage you to seek professional mortgage advice to assist you in your most significant liability obligation.