Posted at 12:00 p.m.
I wonder how the bond rates that dictate the fixed mortgage rates are influenced. Contrary to the publicized announcements of the central bank which inform us about the increases of the variable rates to come, the fixed rates remain a real mystery and their fluctuations seem to me impossible to predict. I’ve read about it, but haven’t quite figured out the mechanics. Be pedagogical, please.
Sophia B.
We must first understand that “to lend money to individuals, institutions must finance themselves,” explains Hendrix Vachon, senior economist at Desjardins.
These institutions use the same tools and draw on the same resources as the federal government: they offer investors the opportunity to acquire bonds — no more and no less than a loan granted to the institution by the investor, repaid at the end of the term agreed, and subsidized by an interest rate determined at the outset.
And so, borrowing on one side and lending on the other, bond rates influence fixed mortgage rates.
However, the institution should not expect “to have a rate as good as that which the federal government will obtain”, adds our economist. “Our risk rating is not the same. »
No institution has a better risk rating than the federal government: the risk of not being reimbursed when acquiring a government bond is minimal.
To convince investors to buy the bonds of a financial institution instead, they must be offered a slightly higher yield in order to compensate for this risk.
Here is added a psychological factor: the perception of this risk by investors.
However, this perception is largely dependent on the economic context: growth or slowdown, inflation, geopolitical situation, etc.
If investors are more nervous, less inclined to take risk, they will be less inclined to lend to financial institutions.
Hendrix Vachon, Senior Economist at Desjardins
We can encourage them to do so by offering them a more attractive interest rate.
The influence of the Bank of Canada
Changes in the Bank of Canada’s key rate have an immediate effect on variable-rate mortgage loans, but they also have an influence on bond rates, and by extension on fixed-rate mortgage rates.
How ?
Essentially by their impact on the future prospects of investors, and therefore on the perceived risk, explains Hendrix Vachon.
“If the Bank’s rhetoric is aggressive enough on interest rates, if it announces that there could be many more hikes, that will drive bond rates up. »
Fixed mortgage rates will therefore take the same direction.
two more layers
Let’s add two more layers.
Between bond rates and fixed mortgage rates, financial institutions apply a “financial intermediation” margin. In less polite terms: a profit margin. “We must at least cover our costs, we must pay the employees,” argues Hendrix Vachon.
However, before the mortgage product is offered to consumers, marketing still has a say.
“There is competition between financial institutions,” says the economist. They could try to position themselves more on one type of mortgage product, or favor another loan maturity to diversify their mortgage portfolio. This too can have an influence on the rates. »
But in the end, Sophie can remember that “the bulk of the piece is still the movements in the bond rates of the federal government”.
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