CM Canada Mortgage Corporation - Real Estate and Mortgage Info.

MARKET WATCH

For Canadian Markets & Stock Quotes click above to access the Canada.com network

Mortgage Rates:
The following graphs track the weekly movements of Canadian mortgage rates against appropriate government bonds and tbills. Prevailing bond and tbill returns influence the cost of mortgage funds, and consequently the price consumers pay for borrowing. Mortgage rates generally follow the market driven rates of bonds and tbills, which are themselves determined by supply and demand forces.

The Tbill and Bond are indications of the base cost of capital in the Canadian market. Mortgage interest rates generally follow the increases and decreases of these benchmarks, albeit lagging behind and with less volatility.

The mortgage market is linked to the capital markets through its competition with other investments for a share of the total supply of savings. Investment funds will flow to segments of the capital market (bonds, stocks and mortgages etc.) which promise the most attractive returns in light of expected risks. This fundamental requires that mortgage investment offer a competitive rate of return in order to attract sufficient capital to satisfy the prevailing demand of borrowers.

Mortgage investment offers a premium "the spread" over other investments that is just adequate enough to compensate investors for the added risks associated with investment in mortgage lending over competing alternatives. These risks include the lower liquidity of mortgage investment, higher chance of loss of capital or return on investment, as well as high acquisition and administration costs relative to investment in government issued bonds..

Government of Canada bonds are considered to have no risk of default on the capital invested or returns promised. The primary risk compensated by the rate on Government bonds and T Bills is inflation. Their liquidity is high as established and active resale markets exist for these instruments. Administration and acquisition costs are minimal.

The Rate Spread chart shown above tracks the distance between the yield on a 5 year bond and 5 year mortgage, and the 1 year T-Bill and the 1 year Mortgage Rates. Mortgage lenders source the money they lend on the open market and must pay the going price. This spread between the cost of capital and mortgage rate is the gross return from which all costs and risk of mortgage lending must be compensated. When market rates increase, reducing the spread, the lender will make an upward adjustment to their mortgage rate in order to maintain the required spread.

The spread between bonds and mortgage rates is due to the investors recognition that homeowners are more likely to occasionally default on repayment than is the Government of Canada, as such this increased risk must be compensated. In addition mortgage investment requires the added expenses associated with investigating and approving the borrower and the real property being mortgaged. Ongoing management of the loan and reinvestment of returns is also required.

Acquisition costs specific to mortage investment can include rate discounting as well as compensation of staff mortgage personnel, or brokers. All of these factors result in mortgage rates being higher than the Bond and T-Bill.

The Bank Rate is a trend setting benchmark set by the Bank of Canada to influence monetary conditions in keeping with policy, such as inflation control or stabilization of the dollar. The Bank Rate is not an arbitrarily set rate as it too is greatly influenced by market forces. This short term rate is watched closely by mortgage lending financial institutions as an indicator in setting their own rates on short term consumer loans.

Graph Data Source: Bank of Canada / Wednesday Rates

Canada Mortgage and Housing Corporation publishes the definitive source of information on the Canadian mortgage market in their quarterly publication titled "Mortgage Market Trends" This publication is ideal for lenders, mortgage officers and brokers, investors, and financial consultants but is also helpful for builders and others in the housing industry. Visit the CMHC-SCHL Market Analysis Electronic Marketplace to to download this document as well as the National Housing Outlook, and Canadian Housing Markets series.