Do you ever wonder what’s behind your mortgage rate? Why are they increasing or decreasing? One of the many reasons why was the economy. The state of the economy matters a lot regarding the rising and reducing interest rates of mortgage loans Canada.
The interest rate tends to be higher when there’s solid economic growth. And when economic growth is weak, interest rates are lower. Why? Because a strong economy demands more money. To keep inflation in check, the Bank of Canada increases the interest rate to keep inflation above the inflation rate target.
Also, the world’s financial markets are interconnected, which is why the global economy also matters. For example, the 2019 Pandemic caused a drop in foreign interest rates, which also affected the Canadian interest rate.
Other factors affect the mortgage rate lenders will give you.
1. Credit risk
If your down payment is below 20% of the purchasing home, you will be required to purchase mortgage insurance which protects the lenders in case of a mortgage payment default. Getting mortgage insurance can give you a lower interest rate because the mortgage is already insured, which assures the mortgage lender.
2. Interest rate risk
The more you renegotiate your interest rate, the more often you face risk.
3. Prepayment risk
Prepayment or early payment of your mortgage causes the risk to lenders of losing more money because they will only be able to profit as much from the fund they raised when you pay it for a longer time.
4. Shop around for lenders
Different lenders have different interest rates, so shopping for lenders with the lowest interest rate is essential. You’ll find a lender with the best deals if you are patient.
What are the types of lenders?
There are various types of lenders. These include:
1. “A” Lender
“A” Lenders or traditional lenders caters to customers with good credit score and reliable income. “A” Lender is where borrowers first inquire about their mortgage.
These lenders require a stress test which determines if a borrower can still afford the interest rate even if it increases in the future. The stress test will determine if the borrower can still pay a 5.25% interest rate or the lender’s rate plus 2%, whichever is higher. If they pass the stress test, they’ll be able to qualify for a mortgage.
2. “B” Lenders
“B” Lenders Canada caters to borrowers who don’t qualify for mortgages or credit cards through traditional lenders. They offer products to borrowers who need strong credit or stable income. They might offer higher interest because they are offering loans to high-risk borrowers.
3. Private Lenders
Private lenders can be a person or a company that doesn’t have the same regulations as banks or credit unions. Consider having your friend or family member be your private lender. They won’t require a stress test during your application, so it’s much easier to qualify for a mortgage.
Apart from economic growth, these are other various factors that generally affect your mortgage rate.
1. Inflation
To fight inflation, the Bank of Canada consecutively raised the interest rate to drop the inflation rate. Inflation sometimes destroys the purchasing power of dollars through time.
Mortgage lenders carefully monitor the rate of inflation and will adjust the rates accordingly. That’s how inflation affects the interest rate. The higher the inflation, the higher the interest rate will be.
2. Housing market condition
When homes are open for resale, there is a high chance of decreasing the mortgage demand resulting in dropping mortgage rates.
A recent trend is also pressuring the interest rate. Individuals tend to rent than buy a home. The demand for homes is decreasing, which leads to lower interest rates.
Conclusion: Mortgage Rate
Buying a home is the most significant decision an individual can make. Learning the pattern of increasing and decreasing interest rates is also important. In that way, you’ll know when you can save more money.
Getting the right time to apply for a mortgage is very important. Do your research and see if it is an excellent time to buy a home. Suppose you can profit from your asset if you buy now.
Choosing the right lender also matters. Knowing the background of the lender and its interest rate will make you take less risk when applying for a mortgage.
If you need any help with your mortgage, connect with us at Private Mortgage Canada or call us at +1 416-825-0142. We answer right away and help you with your mortgage questions.
