Mortgage rates are crucial in determining how much you can afford to spend when buying a home in Toronto! If you’ve ever wondered how mortgage rates are determined, we’re here to explain it to you.
Fixed Mortgage Rates
With a fixed mortgage rate, you have the same rate for your entire mortgage term. Government bond yields—how much interest is paid on bonds—are the primary factor determining fixed mortgage rates. If they go up, fixed mortgage rates go up, and vice versa if they go down.
Fixed mortgage rates are generally a few percent higher than the 5-year Government of Canada bond yield.
Variable Mortgage Rates
With a variable mortgage rate, your mortgage rate can go up or down during your mortgage term. Variable mortgage rates are based on prime interest rates. Which are, in turn, based on the Bank of Canada’s policy interest rate.
Each lender sets its prime rate, which is the rate it charges its most reliable customers, that it isn’t concerned may default on a loan. Suppose the Bank of Canada raises its interest rate. In that case, lenders will raise their prime rates, which can increase the rates charged on variable-rate mortgages.
Other Factors That Impact Mortgage Rates
Other factors can impact the mortgage rate you are eligible for, including:
- Your credit score: If you have a bad credit score, some lenders may see you as a risk and either refuse to lend to you or charge you a higher mortgage rate than they would charge someone with a better credit score.
- The lender will compare your income to the amount of debt you owe: Lenders calculate debt service ratios, which determine how much of your income you’ll have to put toward covering any debt you have. They may ask you to pay a higher mortgage if you have a high debt-service ratio.
- Whether or not your mortgage is “open” or “closed”: With an open mortgage, you can repay as much of your mortgage early as you want. With a closed mortgage, there are limits on how much you can prepay.
Lenders may charge you more for an open mortgage to ensure they make a profit.
How can Northwood Mortgage help me if I want a reasonable mortgage rate for a Toronto home?
Not sure whether a fixed or variable-rate mortgage is best for you? We can discuss both options to determine which type works best for you. Are you looking to refinance an existing mortgage? We can help you with that too!
To learn more about how we can help you obtain a mortgage, call us at 888-257-8130 or online.