As mortgage brokers, one of the most commonly asked questions we hear is about how mortgage rates are determined. Obviously, you are going to see B and C lenders having higher rates than traditional or “A” lenders simply because the loans made by alternative lenders are usually considered higher risk. But where do the A lenders get their rates?
Determining rates for fixed rate mortgages.
When it comes to fixed mortgages (the type of mortgage that most Canadians opt for), chartered banks set their rate according to the Bond Market. You see, while banks must take somewhat of a risk each time they offer someone a mortgage, Government of Canada Bonds are a way for banks to make profit without any risk at all.
Since the income from Government of Canada Bonds is guaranteed, the banks calculate money they will make from those bonds and use it to offset any potential losses they might have with mortgages. Therefore, the better the Bond Market is, the lower rates you will be able to get on a fixed rate mortgage.
Determining rates for variable rate mortgages.
A variable rate mortgage is a mortgage that has a fluctuating interest rate – and this rate is determined somewhat differently than the rates for fixed mortgages. To determine these, chartered banks in Canada will use the overnight rate which is set by the Bank of Canada.
Alternative lenders and determining mortgage rates.
As mentioned earlier, most alternative lenders are willing to offer mortgages when traditional lenders will not. Since they are assuming more risk however, their rates do tend to be higher. The higher the risk that a lender is taking, the higher you can expect the mortgage interest rates to be.
Factors that would tend to make a mortgage higher risk include having poor credit, being self-employed and not being able to prove income, being new to Canada, etc.
How can you get the best rate on a mortgage?
By far the best way to ensure that you are getting the best interest rate for your situation on a mortgage is to work with a qualified mortgage broker. Since mortgage brokers have access to dozens of lenders, they can shop around for you and help ensure that you get the best rates and terms available.
If you are looking for a mortgage, let the team at Akal Mortgages help you. Contact us today for a consultation.
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