Re: How Are Fixed Mortgage Rates Determined?

One blogger picked up on my post from a couple of days ago "How Are Fixed Mortgage Rates Determined?" and asked what he should really be looking out for when it comes to protecting himself from rate fluctuates and what to look out for?

There are so many factors to consider and even economists who dedicate their whole lives to predicting the direction of markets and behaviors of investors can't figure it out. There is no "silver bullet" in regards to knowing where fixed 5 year mortgage rates are headed. If you are really interested in determining where rates are headed and you want to put your energy into it here is what I would do:

#1- At least once a week visit a site like the Financial Post and have a look at the Canadian 5 year bond yield and pay attention to trends. Today the yield is 2.64%... As I mention in my previous blog post the mortgage lenders like to keep a spread of between 1.70% to 1.80% from the bond yield when it comes to the fixed 5 year price. So today the bond yield is 2.64% + 1.80%=4.44% .... currently lenders are offering 4.49%. If this trend continues there will be downward pressure on the fixed 5 year rate.

#2- You have to understand a little about bonds and how they work. In a nutshell bonds are a way for governments to borrow money from the public. When issued the government agrees to pay the holder of a bond an interest rate or yield of x amount over the term of the bond. Once issued the bond price will fluctuate with market conditions but the yield rate promised by the government stays the same.

Bonds are considered to be one of the safest investment choices for an investors and when times are bad investors flock to the bond market to park their money in a safe place. When this happens increased demand causes the price of bonds to increase and the bond yields decrease. This of course causes fixed interest rates to decrease. When other investments like stocks & other securities are performing well investors take their money out of the bond market and the price of bonds drops meaning the bond yield increases which in turn causes the fixed mortgage rates to increase.

This means you need to really pay attention to investor moods... not an easy thing to do.

I hope this helps you out... feel free to contact me with any further questions or comments. And I invite you especially to call me if you have any questions about your mortgage I would be happy to help you. Chris 416.461.0204ext2 Toronto Mortgage Broker.

The Top 10 Mortgage Lenders

As a consumer if you are trying to figure out who the mortgage lenders are in terms of overall service you may (or may not) be surprised to discover that the big 5 banks are not typically considered to be the best.

In the July 2009 issue of Canadian Mortgage Professional magazine brokers were polled to determine their preferred lenders. The ranking is the following:

1. First National
2. Home Trust
3. Equitable Trust
4. Street Capital
5. ING Direct
6. Merix
6. Bridgewater Bank
8. MCAP
9. Macquarie
10. Scotia Mortgage Authority

How Are Fixed Rate Mortgages Set?

The above image is of the Canadian Bond yield vs. the 5yr fixed mortgage rate from February 13th 2009 until the present June 12th as published by Canadian lender Merix Financial.

The bond yield, or rate of return on your bond, is depicted by the blue curve on the graph above while Merix's fixed 5 year is the green curve. As a consumer if you want to know which way fixed rates are moving you want to pay attention to the spread between current fixed rates and the bond yield. Mortgage lenders set their fixed 5 year based on a spread between 1.70 to 1.80%.

So if we look at Merix's fixed 5 year rate of 4.49% and compare it to the current bond yield of 2.71% the spread is 1.78% right on target. (4.49-2.71=1.78)

So what you need to watch for is if their is an increase in bond yields then the spread will continue to shrink and that could cause interest rates to rise.

In summary: Canadian 5 yr bond yields -03bps to 2.71- Four weeks ago it was 2.21. The spread, based on new 5 yr rate of 4.49%, is back in the target zone at 1.78%.