Are you frustrated by climbing mortgage rates? Buying a home is a significant financial investment that will likely involve a mortgage. Over the duration of your mortgage, most money is spent on interest. Even small interest changes can impact payments.
In this article, we will discuss why mortgage rates in Toronto are increasing and their effect on homebuyers.
What factors affect mortgage rates increasing in Toronto?
Suppose you shift your thinking to view mortgages as a product. In that case, you will realize that even financial institutions must be profitable. To make a profit, they must charge people a higher cost. Lenders profit on mortgages from interest payments more than what they pay in funding costs.
Funding costs comprise most of the interest paid on mortgages. Other factors influencing the price are the amount your lender requires to cover risk and operating costs. However, funding costs make up most of what homeowners pay in interest.
But how is funding cost determined?
National and Global Economies
Money that is lent comes from national and global investors/depositors. Funding costs drive interest rates found in these locations. Unfortunately, these rates can rise and fall based on several factors.
Times of strong economic growth generate higher interest rates. Meanwhile, weak overall growth stimulates lower interest rates. In a strong economy, more companies borrow money from investors to expand. Therefore, providers may pay higher interest rates to entice investors to lend money. With a weak economy, the reverse occurs.
Furthermore, Canadian banks borrow their money from other nations like the United States. Each country’s financial market is interconnected to other global markets. Thus, Canadian interest rates respond to what happens internationally. An example is found in 2019 when foreign interest rates decreased. This turn of events resulted in a decrease in Canadian five-year fixed mortgage rates.
The Bank of Canada’s Influence
Changes in interest rates are influenced by policy changes made by the Bank of Canada. With a strong economy, interest is raised to prevent inflation from rising above the target. In a weak economy, policy rates are lowered to prevent inflation from going below the target.
Policy interest rate changes result in similar fluctuations in short-term interest rates like the prime rate. The prime rate is a benchmark for pricing a variable-rate mortgage. It can also affect long-term rates if you expect the change to last longer.
Mortgage Characteristics Affect Payments
Past credit history and mortgage features impact your risk. Increased risks indicate higher interest rates. The most significant risk for a lender is that the person will not repay the loan. Higher credit scores eliminate the concern, which means you are better at paying the debt.
Furthermore, you may need mortgage default insurance if the mortgage is over 80% of your home. Since insurance protects the lender from default risk, you may obtain lower interest rates on uninsured mortgages with larger down payments.
Interest rate risks are also a factor. Most mortgages are renegotiated after five years but can be shorter or longer. The more that renegotiation occurs, the increased risk you will receive a different interest rate. If you are more comfortable with fixed rates for longer durations, then prepare to pay more.
Prepayment risks cost lenders money if the mortgage is repaid early. This occurs because your lender won’t make as much of a profit from funds raised, especially if interest has dropped. Open mortgages allow for early repayment but will have higher interest rates.
Consult Northwood Mortgage for Your Home-Buying Needs
Northwood Mortgage’s team of specialists will assist you in navigating through mortgage rates in Toronto. We will work with you to understand how interest rates can affect you and what your best options are.
Please book your appointment by calling us locally at 416-969-8130. If you are outside the Markham area, call us at 888-495-4825 or contact us here.