Deciphering the Dance: How interest rates affect your Mortgage in Canada

Navigating the world of mortgages in Canada can seem daunting, especially considering how interest rates affect your mortgage rate. With the housing market's ebb and flow, understanding the relationship between the Bank of Canada's interest rates and your mortgage is more crucial than ever.

3 important concepts to be aware of when it comes to interest rates and your mortgage are:

The Role of the Bank of Canada

The Bank of Canada sets the trend for interest rates through its key policy rate, which in turn influences the prime rates at commercial banks – which are the basis for determining lending rates, including mortgage rates.

What influences the interest rates?

This is a question that a lot of people are asking nowadays, mostly because they’ve found themselves with a Variable rate that has gone up in the last year. The main factors that influence the interest rates in Canada are:

• Inflation
• Economic Growth
• Global Economic Conditions

The goal behind increasing or lowering interest rates is to balance economic stability with growth. As a result, when the Bank of Canada raises its rates, borrowing costs increase, directly impacting mortgage rates and, with that, the housing market. As we saw in our area, the demand for homes remained strong but saw a significant decrease due to increased interest rates.

Variable vs fixed mortgage rates

There are two primary types of mortgages in Canada: Variable and Fixed rate. Variable mortgages will fluctuate with the prime rate, which means that as the prime rate increases or decreases, so will your monthly payments. In contrast, a fixed-rate mortgage locks your interest rate for the mortgage term and provides you with stability regardless of market changes. Understanding the changes between the two types is crucial for your long-term financial planning!

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