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How Mortgage Rates Are Set, And What It Means To You

Lenders set their fixed rates based on bond yield, competition by other lenders, expenses, possible risks and profitability. It is up to each mortgage lender to decide the interest rate it wants to charge for mortgages.

Investors study Canada’s economy in comparison with the rest of the world, and based on current and historical trends, they assess the country’s economic future. Their prediction of future interest rates sets bond yield. Currently, investors are predicting bond yield will rise over the next few years.

A key part of the investors’ prediction is the growth in the world economy as it shrugs off the last few years of financial turmoil and consumer spending increases.
Lenders set variable rates based on the ‘overnight rate’. The Bank of Canada sets the target level for this rate. The overnight rate is the interest rate the big financial institutions pay when they borrow from each other. Lenders call the rate they set based on the overnight rate their ‘prime rate’.

Lenders set their prime rate based on profitability, expenses, possible risks and competition from other lenders. Many lenders offer discounts off their prime rate.
What does all this mean?

It looks like fixed mortgage rates will rise over the next few years. Variable rates may remain steady over the next several months, but that could change rapidly as the economy grows. To track bond yield in Canada you can go to


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