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.