4 May


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For many people, their house is the biggest investment they will ever make. That also means that their mortgage may be the biggest loan they ever take out. For the inexperienced buyer, applying for a mortgage can be daunting and confusing. Before making the huge financial commitment of a mortgage, it’s important to understand how they work inside and out. There are many ways to start researching, from looking online, to using mortgage loan calculators, to speaking to a mortgage professional. All of these are good ways to gather information.

Understanding how mortgage rates are set is also a huge asset when applying for a mortgage. Getting the bigger picture of the mortgage market will help you make smart investment decisions. There are many factors involved in setting mortgage rates, so getting all the information can be difficult but it’s important, considering the long-term loan you’re about to enter into.

Online mortgage loan calculators can give you information about the specific property you’re looking at, but there’s a lot more to how mortgage rates are calculated. In this article, we’ll look at the factors that affect mortgage rates, aiming to get an overall picture of how mortgage rates are calculated.

The Basics: What Is A Mortgage Rate?

A mortgage and a mortgage rate are not the same thing. While a mortgage refers to the loan you take out on the house, a mortgage rate is the rate of interest on the loan. This interest rate is influenced by a number of factors, all of which make up the secondary mortgage market.

The Secondary Mortgage Market

There isn’t just one bank or lender, involved in granting a mortgage or setting interest rates. The mortgage market is a secondary market, composed of many different investors. When you are granted a mortgage, the following chain of events happens:

  • Your mortgage is sold by the bank/lender to a third-party investor, known as the aggregator.
  • Your loan is combined with other loans by the aggregator to form a mortgage-backed security.
  • The mortgage-backed security is divided into shares, which are sold to other investors.





These steps create a competitive mortgage market. While the homeowner benefits from lower interest rates, the investors benefit from higher rates. The task of trying to balance these opposing needs falls to the aggregator, and the bank/lender.

This secondary mortgage market is the biggest influencer of mortgage rates. Each step influences the other as well. In one way, mortgage rates are calculated by what the aggregator is willing to pay for the mortgage, but in another they are calculated by the value of the mortgage-backed security, and what investors will pay for the shares.

There are many factors that influence what mortgage shares are worth, and that are important to take into account when calculating your mortgage loan. Inflation, for example, affects every aspect of the economy including wages and the cost of goods and services. Moderate inflation is to be expected, and even good. However, if the bank/lender forecasts higher than usual inflation, they will increase interest rates in order to cover any future losses.

Variable Vs. Fixed Mortgage Rates

When applying for a mortgage, you can choose between a variable rate mortgage or a fixed rate mortgage.

As the name suggests, the interest rate on a variable rate mortgage changes depending on the market. Your monthly mortgage rate will not change, but if your interest is lower or higher it will affect how much of your monthly payment is put towards your principal loan. These rates fluctuate daily according to the rates set by the Bank of Canada.

A fixed rate mortgage is a loan in which the interest stays fixed for the entirety of the term. Many homeowners opt for a fixed rate mortgage for easier financial planning, and to avoid any surprises due to inflation.

However, there are some benefits to a variable rate mortgage, depending on the market. Your interest rate will fluctuate based on the rates that the bank sets. If these rates fall, you can capitalize on the lower interest rates. Variable rate mortgages also allow more flexibility when it comes to breaking your mortgage, with less harsh penalties. Though there is the risk that rates will rise suddenly, banks do try to avoid steeply increasing mortgage rates as it can cause backlash.

Mortgage Loan Calculators

Mortgage loan calculators use your income to determine your mortgage loan. You can find these calculators online, and often real estate websites include them with listings. When determining your mortgage loan, lenders will look at how much you can spend each month, as well as your current expenses. Basically, the higher your expenses the smaller your loan will be.

While online mortgage calculators are handy, they will give you only an idea or estimate of your expected mortgage loan. As you can see, there are many factors that affect both mortgage loans and rates.

If you are hoping to apply for a mortgage, the best way to find out what kind of loan and rates you can expect is speaking to a mortgage professional. They will be able to guide you through the application process and will give you a more precise estimate.

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