The Impact of Interest Rates on Canadian Mortgage Rates

While rising interest rates are something to be aware of, there are ways you can navigate this with your mortgage.

Over the last decade, Canadians have seen some of the lowest interest rates in history. This has been a huge opportunity for first-time homebuyers since low rates make the cost of borrowing cheaper and buying a home easier (in some markets). There’s just one issue: with interest rates so low, they can only go up. When that happens, your monthly mortgage payments may increase. This has made buyers anxious, since rising interest rates may affect how much they can afford. In addition, homeowners who have variable rate mortgages may also worry about how a potential rate hike will affect their mortgage payments. While rising interest rates are something to be aware of, there are ways you can navigate this within your mortgage. 

First you need to understand how mortgage rates are set. Most homebuyers need a loan. This is known as a mortgage: it’s an agreement between you and the lender that sets out the terms, including the interest rate.

When applying for a mortgage, the interest rate you’re offered depends on a few factors, such as:

• the overnight rate set by the Bank of Canada (BoC), which is the rate at which banks borrow from and lend to each other in the overnight market.

• your credit rating.

• your decision between a variable or fixed rate mortgage

• the term or length of the mortgage

In most cases, the overnight rate set by the BoC has the biggest effect on variable rate mortgages. When the BoC increases the overnight rate, variable rate mortgages become more expensive. Conversely when the BoC decreases the rate, carrying a variable rate mortgage becomes less expensive.

Your credit rating is another important consideration when banks determine what mortgage rate they can offer. If you have an excellent credit score, you’ll likely be approved for better rates than if you have a lower credit score. Your credit score is a number between 300 and 900. If your credit score falls between 700 and 900, it is typically considered good. Once your credit score drops below 700, you may find it difficult to get a good rate or even be approved for a loan.

If you want to improve your credit score, you can;

• pay off debt.

• always make payments on time.

• make more than the minimum payments on your credit cards.

• keep your account balances below 35% of your available credit.

(Source: mdm.ca)