About mortgages, my friend Colin likes to say that mort is French for death and gage sounds like gauge, a measuring device. That means a mortgage is just a way to measure your time till death. Clever. Colin doesn’t own a house. He’s been renting the same house since the mid 90’s. Maybe Colin isn’t so clever.
Lending rates are predicted to go up. Many people (including me) are on a variable (floating) rate mortgage and are wondering if (or when) to lock in to a fixed-rate mortgage. “Soon” would probably be a good answer. But if you’re like me, you know that in the long-run variable-rate mortgages are always cheaper than fixed-rate mortgages. You should really be asking yourself “How much risk am I willing to bear?”
That’s a question for you and for me but not for us. It’s an individual choice.
How Mortgage Rates are set
But do you know how mortgage rates are determined? Do you know why the prime rate is important? Here’s the answer:
Variable-rate mortgages are linked directly to the prime rate. The prime rate is set by the Bank of Canada. The Bank of Canada controls our monetary policy, which controls the supply of money available in the economy and thus helps control the economy. Makes sense, right?
Pricing for fixed-rate mortgages, by contrast is a little trickier. Fixed-rate mortgages are priced in relation to the bond markets. For investors, bonds are the main competing investment to mortgages. Bonds are simpler investments in terms of fees and risks, so mortgages generally are priced 1%-2% higher. There is more going on with this kind of investment, so discounts off the posted rates are (almost) always available.
Either way, mortgages are negotiable. Shop around. Get a good one.