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Vancouver Real Estate Mortgage Calculator Q&A

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http://ElizabethRoseBlogs.com - Elizabeth Rose shares how inflation affects mortgage rates

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Mortgage interest rates have a very significant impact on the overall long-term cost of purchasing a home through financing. On one hand, mortgage borrowers are seeking the lowest possible rates; on the other, mortgage lenders have to manage their risk through the interest rates they charge. The lowest mortgage interest rates are only available to borrowers with the most solid finances and sterling credit histories.

While the financial health of borrowers affects how good an interest rate they can get, larger economic factors and government financial policy affect the whole mortgage rate universe. You can boil it down to these five important factors. All represent basic rules of supply and demand in one form or another. It's a little technical, but learning these principles will give you a good way to think about what you're paying now and what could be coming in the future.

Inflation

The gradual upward movement of prices due to inflation is an important factor in the overall economy and a critical factor for mortgage lenders. Inflation erodes the purchasing power of dollars over time. Mortgage lenders generally have to maintain interest rates at a level that is at least sufficient to overcome the erosion of purchasing power through inflation to ensure that their interest returns represent a real net profit.

For example, if mortgage rates are at 5% but the level of annual inflation is at 2%, the real return on a loan in terms of the purchasing power of the dollars the lender gets back is only 3%. Therefore, mortgage lenders carefully monitor the rate of inflation and adjust rates accordingly.

The Level of Economic Growth

Mortgage rates are also influenced by economic growth indicators, such as gross domestic product (GDP) and the employment rate. Higher economic growth levels generally produce higher incomes and higher levels of consumer spending, including more consumers seeking mortgage loans for home purchases. That's all good, but the upswing in overall demand for mortgages tends to propel mortgage rates higher. The reason: Lenders have only have so much money available to lend out.

Naturally, the opposite effect results from a weakening economy. Employment and wages decline, leading to decreased demand for home loans, which in turn puts downward pressure on the interest rates offered by mortgage lenders.

Federal Reserve Monetary Policy

The monetary policy pursued by the Federal Reserve Bank is one of the most important factors influencing both the economy generally and interest rates specifically, including mortgage rates. The Federal Reserve does not set the specific interest rates in the mortgage market. However, its actions in establishing the Fed Funds rate and adjusting the money supply upward or downward have a significant impact on the interest rates available to the borrowing public. Generally, increases in the money supply put downward pressure on rates, while tightening the money supply pressures rates upward.

The Bond Market

Banks and investment firms market mortgage-backed securities (MBSs) as investment products. The yields available from these debt securities must be sufficiently high to attract buyers. Part of this equation is the fact that government and corporate bonds offer competing long-term fixed income investments. The money you can earn on these competing investment products affects the yields that are offered on MBSs. That means that the overall condition of the larger bond market indirectly affects how much lenders charge for mortgages. The reason: Lenders have to generate sufficient yields for MBSs to make them competitive in the total debt security market.

One frequently used government-bond benchmark to which mortgage lenders often peg their interest rates is the 10-Year Treasury bond yield. Typically, the average spread for MBSs above the 10-year Treasury bond yield is approximately 1.7%. MBS sellers must offer higher yields, because repayment is not 100% guaranteed, as it is with government bonds.

Housing Market Conditions

Trends and conditions in the housing market also affect mortgage rates. When fewer homes are being built or offered for resale, the decline in homes being purchased leads to a decline in the demand for mortgages and pressures interest rates downward. A recent trend that has also applied downward pressure to rates is an increasing number of consumers opting to rent rather than buy a home. Such changes in the availability of homes and consumer demand affect the levels at which mortgage lenders set loan rates.

The Bottom Line

Mortgage rates are tied to the basic rules of supply and demand. Factors such as inflation, economic growth, the Fed's monetary policy and the state of the bond and housing markets all come into play. Of course, your own financial health will also affect the interest rate you are offered. So do your best to keep it as healthy as possible. For more, see How Interest Rates Work on a Mortgage.

Continue Reading

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The Most Important Factors that Affect Mortgage Rates | Investopedia

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Mortgage interest rates have a very significant impact on the overall long-term cost of purchasing a home through financing. On one hand, mortgage borrowers are seeking the lowest possible rates; on the other, mortgage lenders have to manage their risk through the interest rates they charge.

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This picture is showing us that over time with a 2% inflation rate our dollar value drops even with the same amount of money, our dollar has less purchasing power as time goes on.

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This picture shows that after adjusting for inflation the when we pay for mortgages were actually getting consistently lower rates than advertised since inflation makes our money worth less.

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This picture illustrates how inflation would lead to higher mortgage rates in a linear fashion.

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This video explains why banks want you to pay off your mortgages sooner rather than later. Since if there is inflation your money today wont be worth as much "buying power" or "purchasing power" a few years down the road. So if you pay off your mortgage sooner than the banks would have more purchasing power with your money because its worth more now than later.

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This is a "napkin" discussion about the impact of inflation and why it is the bank's biggest concern regarding your mortgage...and therefore should be your's as well.

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This video is about how if the economy is bad than its good for your mortgage. They talk about how now its a good time to buy and refinance since the economy is bad the bonds are up and since the bonds are up the rates are low real estate is a safe investment.

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| Finance & Capital Markets | Khan Academy

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DiSpirito Team Top Real Estate Professionals

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How Does the Bond Market Affect Mortgage Rates?

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Providence Home Lending provides resources for people who are buying a home or want to refinance their mortgage purchase or home. We learn more about how Providence Home Lending can aid with the refinancing process. Plus, more on what is happening in the bond market, and how it reflects what's happening in the U.S.

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In this video the lady explains how as a bonds holder in real estate if you invest money and get fixed rate returns it could hurt you if inflation picks up since over time your returns would be worth less and less purchasing power even though your getting the same amount of money and if that happens your going to demand more returns from the banks which would force the banks to increase mortgage rates for the consumer.

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Vancouver Real Estate Mortgage Calculator Q&A

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http://ElizabethRoseBlogs.com - Elizabeth Rose shares how inflation affects mortgage rates

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This article speaks about the 5 most important things that can affect our mortgage rates. The thing I found most interesting about this article was that in order to make sure their interest returns make a real net profit the mortgage lenders would need to adjust their rates so that the percentage they make is larger than the inflation rate so the money does not drop value to fast.

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Mortgage interest rates have a very significant impact on the overall long-term cost of purchasing a home through financing. On one hand, mortgage borrowers are seeking the lowest possible rates; on the other, mortgage lenders have to manage their risk through the interest rates they charge. The lowest mortgage interest rates are only available to borrowers with the most solid finances and sterling credit histories.

While the financial health of borrowers affects how good an interest rate they can get, larger economic factors and government financial policy affect the whole mortgage rate universe. You can boil it down to these five important factors. All represent basic rules of supply and demand in one form or another. It's a little technical, but learning these principles will give you a good way to think about what you're paying now and what could be coming in the future.

Inflation

The gradual upward movement of prices due to inflation is an important factor in the overall economy and a critical factor for mortgage lenders. Inflation erodes the purchasing power of dollars over time. Mortgage lenders generally have to maintain interest rates at a level that is at least sufficient to overcome the erosion of purchasing power through inflation to ensure that their interest returns represent a real net profit.

For example, if mortgage rates are at 5% but the level of annual inflation is at 2%, the real return on a loan in terms of the purchasing power of the dollars the lender gets back is only 3%. Therefore, mortgage lenders carefully monitor the rate of inflation and adjust rates accordingly.

The Level of Economic Growth

Mortgage rates are also influenced by economic growth indicators, such as gross domestic product (GDP) and the employment rate. Higher economic growth levels generally produce higher incomes and higher levels of consumer spending, including more consumers seeking mortgage loans for home purchases. That's all good, but the upswing in overall demand for mortgages tends to propel mortgage rates higher. The reason: Lenders have only have so much money available to lend out.

Naturally, the opposite effect results from a weakening economy. Employment and wages decline, leading to decreased demand for home loans, which in turn puts downward pressure on the interest rates offered by mortgage lenders.

Federal Reserve Monetary Policy

The monetary policy pursued by the Federal Reserve Bank is one of the most important factors influencing both the economy generally and interest rates specifically, including mortgage rates. The Federal Reserve does not set the specific interest rates in the mortgage market. However, its actions in establishing the Fed Funds rate and adjusting the money supply upward or downward have a significant impact on the interest rates available to the borrowing public. Generally, increases in the money supply put downward pressure on rates, while tightening the money supply pressures rates upward.

The Bond Market

Banks and investment firms market mortgage-backed securities (MBSs) as investment products. The yields available from these debt securities must be sufficiently high to attract buyers. Part of this equation is the fact that government and corporate bonds offer competing long-term fixed income investments. The money you can earn on these competing investment products affects the yields that are offered on MBSs. That means that the overall condition of the larger bond market indirectly affects how much lenders charge for mortgages. The reason: Lenders have to generate sufficient yields for MBSs to make them competitive in the total debt security market.

One frequently used government-bond benchmark to which mortgage lenders often peg their interest rates is the 10-Year Treasury bond yield. Typically, the average spread for MBSs above the 10-year Treasury bond yield is approximately 1.7%. MBS sellers must offer higher yields, because repayment is not 100% guaranteed, as it is with government bonds.

Housing Market Conditions

Trends and conditions in the housing market also affect mortgage rates. When fewer homes are being built or offered for resale, the decline in homes being purchased leads to a decline in the demand for mortgages and pressures interest rates downward. A recent trend that has also applied downward pressure to rates is an increasing number of consumers opting to rent rather than buy a home. Such changes in the availability of homes and consumer demand affect the levels at which mortgage lenders set loan rates.

The Bottom Line

Mortgage rates are tied to the basic rules of supply and demand. Factors such as inflation, economic growth, the Fed's monetary policy and the state of the bond and housing markets all come into play. Of course, your own financial health will also affect the interest rate you are offered. So do your best to keep it as healthy as possible. For more, see How Interest Rates Work on a Mortgage.

Continue Reading

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The Most Important Factors that Affect Mortgage Rates | Investopedia

# data[].attributes.attachment_link.description
Mortgage interest rates have a very significant impact on the overall long-term cost of purchasing a home through financing. On one hand, mortgage borrowers are seeking the lowest possible rates; on the other, mortgage lenders have to manage their risk through the interest rates they charge.

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This article talks about Canada's GDP, real estate market, the jobs report, and how our economy and the US economy are linked and how all these things are linked together. One piece of information that I found that is particularly interesting is that if our GDP is declining the Bank of Canada might lower interest rates on real estate so that more people would purchase homes and mortgages so that they can boost our economy.

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Yesterday, we told you how the rate of inflation affects interest rates. While it is important to understand how inflation works, there are several other indicators that are important to watch that also affect mortgage rates in Canada.

The Jobs report is one of the most important economic indicators to have an influence on mortgage rates. The report looks at the number of both full- and part-time jobs, average hourly earnings, and the unemployment rate across the country. Released on the first Friday of every month, the figures help economists anticipate how well Canadian businesses are doing. Economic growth is dependent on job growth and with job growth comes the opportunity for more consumer spending. If the jobs report produces a strong result we can expect mortgage rates to stay the same or potentially increase. If numbers are lower than expected, rates may stay the same or go down.

Canada's gross domestic product (GDP) is the value of all goods and services produced every year and measured quarterly. The service industry in Canada accounts for more than two thirds of its GDP. If the GDP is low, the Bank of Canada may lower interest rates in hopes that it will increase consumer spending and, furthermore, boost the economy. While lowering the key overnight lending rate does not affect fixed mortgage rates, it will influence variable rate mortgages which are attached to the prime rate.

Canada's economy is directly affected by the U.S. economy. History shows that Canada is usually a year or two behind the U.S., in terms of economic growth or decline. When the stock market crashed in September 2008, a 5-year fixed mortgage rate in Canada was on average 5.35 per cent. In May 2009, just 9 months later, this rate was as low as 3.75 per cent, a difference of 1.6 per cent. Variable mortgage rates lowered even further, going from 4.75 per cent to 2.25 per cent. While you may not have a particular interest in how our southern friends' economy is doing, remember that if the U.S.'s economy is declining, it will eventually affect Canada in a number of ways.

Two leading factors as to why our economy is so attached to the U.S. are our exports and the Canadian dollar. The United States is Canada's largest trading partner. The U.S. purchases as much as 73 per cent of Canada's exports and 63 per cent of Canada's imports come from the U.S. A declining economy affects the ability of banks, companies, and consumers to provide goods and services and to spend money. If the Canadian dollar is below the U.S. dollar, importing from Canada becomes more cost-effective. If the Canadian dollar is worth more than the U.S. dollar, Canadian exports become more expensive for Americans to purchase. And if the Canadian dollar's worth is high enough to be affecting exports, it will also affect tourism and consumer spending within the country. Most Canadians see a good dollar as a time to travel to the U.S. and spend money there. But, again, going back to consumer spending and GDP, if Canada needs a boost, the Bank of Canada could lower interest rates, which will influence variable rate mortgages.

Finally, the number of housing starts is a lead indicator for how the economy is doing. Housing starts are the number of housing units that have been started in a given period of time. A single-dwelling household equals 1 housing start and a condominium development of 150 suites equals 150 housing starts. In Canada, 2010 started off with a large number of housing starts but dwindled at the end of the year. Some experts believe 2011 will see a low number of housing starts, with the new governing mortgage approvals and shortened amortization periods. The rules of supply and demand play an important role when it comes to housing starts. In a slow market, if a lot of new homes are being built, demand will be low and supply high, meaning that house prices could decrease. Typically, if housing starts are high, builders are expecting increased demand from consumers.

Are you starting to see how it is all linked? One thing to remember is that all of these factors are not independent of each other. If jobs are created, people will consume more and, if they have the resources to do so, will want to get into the real estate market. With fewer jobs comes less spending, which starts a decline in the economy, and in an attempt to boost it, interest rates may be lowered to make the cost of borrowing more affordable to encourage consumer spending. The later response describes the situation Canada has been in for the past few years. Mortgage rates have been near record lows to spur consumer spending. Now that the economy is heading in a new direction, we can expect mortgage rates to increase as well.

Caitlin
Writer for RateSupermarket.ca

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Understanding The Top Economic Indicators That Affect Mortgage Rates - MoneyWise

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Yesterday, we told you how the rate of inflation affects interest rates. While it is important to understand how inflation works, there are several other indicators that are important to watch that also affect mortgage rates in Canada. The Jobs report is one of the most important economic indicators to have an influence on mortgage rates.

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This Article talks about the current inflation rate and how it might affect our mortgage rates. The article states the exact numbers of inflation and what the Bank of Canada is suggesting with mortgage rates. They say that from the banks point of view that Canada's inflation rate currently wont have an effect on our fixed and variable mortgage rates for a while.

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Will the Latest Canadian Inflation Data Affect Our Mortgage Rates? | Dave The Mortgage Broker

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Last week was a slow one for economic news but we did receive our latest inflation data, for March. Statistics Canada confirmed that overall inflation, as measured by our Consumer Price Index (CPI), rose by 1.3% last month, which was a little less than our 1.4% rate in February but slightly above the 1.2% rate that the consensus had been expecting.