How Are Rates Determined in Canada?

Variable Rates

There are two components that make up a variable mortgage rate:

Prime rate, determined by the Bank of Canada, and the discount (or premium) to the Prime rate - determined by the banks.

The Bank of Canada meet every 6 weeks to determine what is called the overnight lending rate, which in turn affects the Prime rate. If Prime changes, so does your variable rate.

The other component is discount (or premium) to Prime rate. If your loan is registered as a mortgage, your discount will remain the same throughout the period of your term.

Fixed Rates

Fixed rates are determined mainly by bond yields.

For example, the 5 year bond yield is closely tied up to the 5-year fixed rate. The range (or spread) for investor desired profitability, at the present moment, is in the region of 1.90 and 2.10. This is also known as the "comfort zone".

If the increase in bond yield continues upward, the spread shrinks, which could prompt interest rates to rise.

### Posted on: March 01, 2013 by Tino Brelak.


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