Canada Interest Rates and What You Need to Know Before Buying a Home

Posted by: shawn on 11/18/2011

The current real estate market, including affordable real estate prices and lower than average Canada interest rates, has made purchasing a home an attractive possibility for many first-time home buyers. However, it’s important to understand interest rates—including when they will rise and by how much—before making the decision to purchase a home.

Canada Interest Rate Basics

Interest, quite simply, is the amount of money paid by the borrower to the lender for the privilege of borrowing money. Interest rates are determined by a number of factors, including the Bank of Canada’s overnight rate, the prime rate, and current interest in the bond market.

When shopping around for a Canada mortgage rate, most people opt for one of the following types of mortgage:

Fixed Rates

A fixed rate is locked in at the time your mortgage papers are signed and does not change throughout the life of your loan, unless you refinance your mortgage to a lower rate at a later point. Fixed rates provide stability and the comfort of knowing exactly how much your mortgage will be each month, but they are usually slightly higher than a variable rate.

Variable Rates (adjustable rates)

Variable rates, also known as adjustable rates, change more frequently than fixed rates. A typical variable rate may change every six to twelve months depending on the current market rate. In many cases it won’t change, at least not significantly, but if rates rise sharply, it could make it so you could no longer afford your mortgage payment. This could lead to serious financial issues, such as increased debt or even filing a Canada bankruptcy.

Hybrid Rates

As the name implies, a hybrid loan is a combination of both fixed and variable loans and cycles between the two. Many financial experts believe that in the current market, this is the best type of mortgage to get.

When Do Interest Rates Change?

In Canada, interest rates can change four times a year. Key interest rate announcements are made eight times a year, and a monetary policy report is given four times a year as well.

If you have a fixed mortgage, it’s wise to keep abreast of these changes if you plan on refinancing your home. Many people refinanced while rates were at historic lows. If you were one of these people, don’t expect your rate to go much lower.

Adjustable, or variable, rates change more often than fixed rates as the interest rate revolves around the prime. How frequently your mortgage will actually change depends on the term of the loan, so it’s important to understand it completely before settling on a variable rate. Current interest rate predictions believe the rate may begin to increase subtly in 2011, so if you have a variable rate it’s a good idea to discuss rate fluctuations with your mortgage broker.

Canada interest rates and how they will fluctuate can be a difficult concept to grasp and can be even more difficult to predict. However, it’s important to understand how interest rates are calculated and when they are expected to rise before deciding on the type of loan you will get. You can begin your research on the Internet but it’s also advisable to speak with a mortgage professional before making any financial decisions.