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Understanding Mortgage Rates in Canada


April 8, 2022 ( Newswire) Several factors contribute to the mortgage process and rates. Understanding the elements that affect your rate can help you decide about the loan and determine your costs in the long term.

Miniature house with approved mortgage application and house keys on table
Credit: Freepik

Minor changes in interest rates can impact your financial plan to make a big difference in your monthly payments. So, it is crucial that you understand mortgage rates in your region, whether you’re house hunting or already a homeowner.

Inflation Influences Interest Rates

Inflation is the progressive increase in prices of goods and services in an economy, reducing the purchasing power for many households. When the Bank of Canada (BoC) observes a persistent change in inflation, it changes the interest rate to achieve the inflation target.

Many creditworthy customers can benefit from receiving a prime rate from central banks. The prime rate Canada residents receive is at its lowest in history, standing at 2.45 percent. However, with inflation on the rise, interest rates, including prime rates, could start rising again.

If the economy is booming, the BoC might increase the interest rate to control people’s spending and prevent prices from increasing excessively. In contrast, if the economy is weak and inflation droops to extreme lows, BoC will lower overnight interest rates. The top banks generally follow that guideline and adjust their prime rate in the following weeks.

Economic Condition Can Cause Fluctuations

The state of the economy in Canada and other countries can drive the interest rates up or down. Strong economic growth in Canada means more demand for money, leading to higher interest rates. When an economy is weak, the interest rates are lower.

The global economy also plays a critical role in interest rate fluctuations because many Canadian banks borrow money from other countries. The world’s financial markets are interconnected, so, Canadian banks may respond to interest rate changes in other regions.

Competition Between Lenders Can Affect Rate

Shopping around while looking for a mortgage can help you lock in a better rate because the mortgage market in Canada is highly competitive. Since many lenders are available, some of them may offer better deals to potential clients for more business.

When a lender is aware that their competitor offered you a lower rate, they may try to match the price to encourage you to borrow from them instead. So, the mortgage rate you get can depend on the level of competition among lenders in Canada.

Your Personal Life Plays a Role

Your past credit history and current income status can help lenders determine if you’re financially capable of repaying the loan. A higher credit score and steady income can reassure lenders that you can repay debts on time.

When a lender trusts you based on your financial abilities, they may offer you a lower mortgage rate to have you as a client. However, a lower credit score or no proof of income can lead to higher mortgage rates or the risk of finding a lender.

Understanding mortgage rates can help you better understand if the rates lenders offer you are reasonable. Doing thorough research will prepare you for the process and help you get the best mortgage rate.

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