Learn how Fixed Mortgage rates go up when Variable rate is coming down

Over the past few months lot of my Hamilton-Burlington Area Home Buyers asked me how can fixed mortgage rates be going up when variable rate is coming down?Thants a great questions.How do you choose whether to go short or long term on your mortgage when it comes up for renewal?


Variable rates are tied to your bank's prime rate, which is based directly on the Bank of Canada rate. The central bank uses its rate as a tool to achieve the goals of "Low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt." Our central bank sets the trend for short-term interest rates and has a direct impact on short-term rates for mortgages and lines of credit, as well as rates paid on deposits and investment certificates.


Fixed-term rates, such as long-term mortgage rates, by contrast, are based on the bond market. Bonds are issued by governments and large businesses. We've all heard of Canada Savings Bonds, right? And they are just one type of bond. The "yield" of the bond is the annual rate of return, expressed as a percentage. Bond yields can be volatile and fluctuate in response to various political and economic factors, such as inflation and unemployment figures, and developments in the stock markets. They are increasingly affected by global forces.

Long-term mortgage rates (3 years and longer) are based on bond yields, but are less volatile because financial institutions absorb the daily market fluctuations in order to create a more stable rate environment for their customers. Generally speaking, higher bond yields increase funding costs for banks, which in turn leads to increased long-term fixed rates.

Conversely, lower bond yields lower banks' funding costs and lead to lower long-term mortgage rates.

So, short-term rates move with the Bank of Canada's needs, while longer-term rates are tied to the bond market. The Bank of Canada can influence long-term rates, but it has no direct control over them. This difference in how rates are set is the reason we sometimes see short-term and long-term rates moving in unison, while at other times they diverge.


Perhaps the easiest and best solution is to break your mortgage into pieces and diversify your borrowing across short and long terms. This is mortgage "laddering," a concept Canadians know and use to stagger their GIC maturities for diversification, but which surprisingly few of us use for our mortgages.

Diversification is an important principal that applies as much for borrowing as it does for investing. By blending different types of mortgages and staggering maturities, you can diversify your interest rate risk, and perhaps minimize your interest costs.


I hope this finds you Happy and Healthy!

All the Best!
Jimmy
Any Questions regarding Hamilton-Burlington Real Estate Visit:-

www.jimmysingh.ca