While there are a lot of big purchases you’ll make in your life, it’s highly likely that buying a home will be the biggest one. It’s also just as likely that you can’t just pay it all off in one go, so naturally, you’ll need to borrow money through a mortgage. All mortgages have interest rates, but mortgage interest rates vary and how high they are depends on a variety of factors.
What’s the Primary Factor Behind Mortgage Interest Rates?
Because houses are expensive, and lending out the massive amount of money needed to pay off homes isn’t practical for financial institutions to do, especially all at once. Additionally, because banks and credit unions need to keep their workforce paid and be able to grow, they need to be able to make money. This comes in the form of interest on loans. When money is borrowed, the lender profits because they are getting more money than what they initially gave out (in this case, a mortgage).
But the initial money had to come from somewhere before the bank had it, right? Banks and other financial institutions pay to borrow money which is known as a “funding cost.” This cost is affected by many things and is directly related to how much your mortgage interest rate is.
The Economy in Canada Can Affect Funding Costs
The economy in Canada affects many different things and mortgages are definitely one of those. Funding costs are generally impacted the most by the strength of the economy. When the economy is doing really well interest rates are higher because more people are interested in borrowing money. When the economy isn’t doing as well, interest rates are lower because fewer people need to borrow money.
The Global Economy Affects Mortgage Interest Rates
Oftentimes, banks in Canada borrow money from lenders in other countries like the United States. Of course, this isn’t the only place money is borrowed from. The financial world is highly interconnected nowadays and many deals and trades are going on every second from many different countries.
However, what this means is that funding costs can be greatly affected by the state of other countries. This is why the 2008/2009 housing crash in the United States also greatly affected people in Canada as well (and mortgage interest rates).
Your Credit History Can Greatly Affect Your Mortgage
Your credit score is a reflection of your trustworthiness in repaying back debt which is why it’s one of the main factors in getting a mortgage and the interest rates associated with it. Thus, a high credit score shows that you are at a low risk for lending money as you can be trusted to pay it back on time.
How Prepayment Risk Affects Your Mortgage Interest Rates
Another factor that influences your mortgage interest rate is prepayment risk. Let’s say you’ve paid about a quarter of your mortgage back and you win the lottery. You decide to use some of your lottery winnings to pay off the rest of your mortgage immediately. This is great news for you, but not as great for the lender.
Because you paid it back early, they received less interest and therefore made less of a profit. Therefore, lenders typically offer both an “open” mortgage and “closed” mortgage as options. Open mortgages allow you to pay back the mortgage as soon as you have the money available, but have higher interest rates, while closed mortgages have lower interest rates but limit how much you can pay back on the loan at a time.
Getting a mortgage isn’t like getting the same product at every store you go to though. Like other purchases, by shopping around and checking out what each financial institution can offer you for both a mortgage and a low mortgage interest rate you can get the best possible deal. There are a huge variety of financial institutions to choose from, so pick the one that best suits your needs and offers you a good deal.
Reduce your mortgage balance even faster with our additional prepayment options without penalty with either an anniversary payment up to 20% of your original mortgage amount or additional top up to 50% of your mortgage payment monthly. We can easily set a monthly auto payment for you!