The age-old rate debate. In this blog post, we talk a bit more about whether variable rate mortgages are better than fixed.
As most of us know, sneezing can spread germs pretty quickly. When germs spread, they can cause people to get sick. While germs from a sneeze can travel far, the people closest to us will get hit by them first. Let’s take the United States and Canada for example, when the United States makes a change, Canada usually feels the effects of it first. That being said, US rate changes can have an effect on Canadian mortgage rates.
Two Mortgage Options
In Canada, borrowers can choose between two different types of mortgage rates- a variable rate or a fixed rate. A variable rate is influenced by the prime rates set by large banks. Those prime rates are impacted by the Bank of Canada’s overnight rate. The overnight rate changes based on what the Bank of Canada wants the economy to do. A fixed-rate, which is also influenced by the Bank of Canada, is determined based on the price of Canada Savings Bond. When bonds see a change, fixed-rate mortgages will also see a change.
Fixed Rates Tied to Bonds
Fixed-rate mortgages are typically the more popular option since they are seen as “safer”. Fixed-rate mortgages are influenced by long-term bond prices. Banks sell bonds, which fund lending to mortgage holders, or lenders. The price that banks trade bonds is tied to the United States bond prices. So, when rates rise, the prices of bonds fall. When the price of a bond falls, the banks will tighten their lending, causing mortgage rates to rise.
US and China Trade War
The kerfuffle that we are seeing between the US and China can have an impact on fixed-rate mortgages. In the US, there is a concern that the escalating trade war will negatively affect the economy. This will drag down interest rates for long-term bonds. When the interest rates for long-term bonds drops, we will likely see economic growth slow. With that, short-term interest rates will drop. In Canada, this will put pressure on long-term bond rates to decrease as well, which will have an impact on fixed-rate mortgages.
The central bank in the United States and the Bank of Canada are currently in disagreement with the bond market. We’ve seen the effects of this by fixed-rate mortgage being lower than variable-rate mortgages here in Canada. With the US and China still feuding, the central bank in the States will need to keep cutting in order to sustain its growth. Even though there is tension between the US and China, the Canadian economy is looking healthy. Fixed rates will likely hold where they are or drop slightly if Canada feels any pressure. If the Bank of Canada feels pressure, they will adjust the overnight lending rate. When the overnight lending rate falls, we will see variable rates drop.
So, while a sneeze can spread germs to those around you, it will take a little time for the sickness to show symptoms. The same goes for the United States and Canada mortgage rates. While the United States is feeling the heat, the Canadian economy is looking healthy. If Canada starts to feel “symptoms” from the US, they will adjust their rates accordingly. For more information about how mortgage rates are determined, come chat with us at Clinton Wilkins Mortgage Team. You can get in touch with us here.