How Mortgage Rates Are Determined
There are a variety of factors that go into how mortgage rates are determined. A mortgage is a loan that may be used to buy property, construct or buy a building, consolidate debt, or make a large purchase. A mortgage rate is the amount of interest you pay for borrowing money for an extended amount of time. Mortgage rates are displayed in a variety of ways, such as APR (annual percentage rate), and sometimes this can be misleading.
Factors that determine mortgage rates
Your credit score will affect your mortgage rate, and here is why. A high credit score indicates that you have a history of paying back your loans on time and in full. Mortgage lenders will take into consideration your previous job history, any other mortgage rates you have previously applied for, and your loan to value ratio.
Debt to Income Ratio
Your debt to income ratio can also affect the mortgage rate you are offered. A high debt to income ratio will indicate that you may have trouble paying off your bank loans and may not be able to handle the amount of money you are borrowing.
Lender Fee Structure
Lenders will charge different types of fees when providing their mortgage services.
These fees can include application fees, origination fees, and processing fees. If a lender charges a large number of fees they will likely be able to afford to give you a lower interest rate on your mortgage. This is so, as the lender can then make more money on the loan it has made.
Lenders that have been approved to practice a particular type of mortgage can be expected to offer that type of mortgage at market rates to their customers. Lenders that are doing a large volume of lending will be able to give the market rate of a particular mortgage.
What influences mortgage rates?
Cost of Funds Index (COFI)
The COFI is a number that represents how much banks have to pay to get business loans and home mortgages. If the COFI is high, banks will be able to offer lower mortgage rates. Over time, the COFI can increase and cause mortgage rates to rise.
Treasury Bond Rates
Treasury bonds are government-backed bonds that carry a minimum interest rate of 4%. This means that a mortgage loan with a COFI of 4% will have to pay interest on the amount borrowed from the government in order to stay competitive with Treasury Bonds.
Gross Domestic Product (GDP)
If a country’s GDP is high, it may indicate that the country is doing very well. This can lead to an increase in home sales and an increase in demand for mortgages. When demand for a good increases, supply decreases, and the cost of the good increases (like homes).
Interest Rates Set by the Bank of Canada
The Bank of Canada is responsible for setting interest rates which in turn affect mortgage rates. Monetary policy is concerned with the supply of money in an economy and the value of a country’s currency. If the Bank of Canada lowers interest rates, mortgage rates will likely decrease as well.
Here are ways to get a better mortgage rate and avoid the cost of higher interest rates
Apply for a Mortgage Loan Pre-approval
The first step in getting a mortgage loan is to get pre-approved. You can anticipate getting a mortgage pre-approval from a lender when you apply for a car loan or credit card. The pre-approval will show that the lender is interested in your application for a mortgage.
Get Pre-approved for the Right Mortgage Loan
It is important to get pre-approved for the right loan. Take time to research the different types of mortgages that are available and learn about their costs and benefits.
Get Pre-approved for the Right Mortgage Amount
It is important to only get pre-approved for the amount of money you need to buy your house. If you take on too much debt and are not able to pay it off, it could effect your credit score for years to come.
Get Pre-approved for the Right Interest Rate
It is important to get pre-approved for a mortgage with an interest rate that you can afford.
Get Pre-approved for the Right Lender
It is important to only get pre-approved with a lender that has a good reputation and offers competitive interest rates.
Of course, there will be other factors that can influence your specific rate and whether you can get a better mortgage rate. Speaking with a mortgage agent is a great first step. You can speak with a mortgage agent and get free no-obligation rates here.