Why do the Canadian mortgage rates move the way they do? Why don’t the Canadian Mortgage rates march in lock step with other interest rates?Interest rates in the bond market influence Canadian mortgage rates, but that isn’t where the money for mortgages comes from.
Canadian Mortgage Rates
Banks get their mortgage money the same way they get other money: they take in deposits from bank accounts, GICs, etc., and then loan out the money at a higher rate. The difference, or the spread, is how commercial banks make most of their money.
The banks then put thousands of those mortgages together and repackage them as “mortgage-backed securities.” These are sold to other institutions as a unit. Since Canadian first mortgages are typically backed by housing assets, mortgage-backed securities here are seen as pretty safe investments, though the subprime variety were a disaster in the United States.
Here’s where bonds come in: The bond market is made up of traders sitting at terminals in the world’s financial capitals. The market is much bigger than the stock market and in many ways more important, since it affects day-to-day interest rates.
When then banks want to set mortgage rates, they look at the yield, or interest rate, the bond is paying.
“Say the interest rate yield on a five-year government of Canada bond is 3%. The banks then have to set a rate high enough to cover all their costs of origination, selling and servicing the mortgage. They still have to be competitive with other lenders, so they set the five-year mortgage rate at 7%, but then discount on a person-by-person basis to around 5.5%” says Brendan Calder, now an adjunct professor at the Rotman School of Management at the University of Toronto. “So, if you want to know where mortgage rates are heading, watch the yields on government of Canada bonds,” says Mr. Calder. “That’s what mortgage brokers do.”
Canadians have borrowed a total of $879-billion against their houses, according to the Bank of Canada.Banks didn’t always dominate the mortgage business. Until changes to the Bank Act in 1967, banks were not allowed to lend mortgages. Back then, trust companies dominated the business.
“The market dominance of the banks in the mortgage business has continued to grow,” says Mr. Calder.
As real estate prices have risen, so has the amount of money borrowed against residential properties.
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The above information is provided as a guideline and is not intended to give a professional legal advice. Please consult a real estate lawyer for their opinion on your particular case.
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