The mortgage space has been buzzing with activity over the past couple of months as mortgage rates have been on the decline. One of the most common concerns for home buyers is buying at the right time. Not only does that entail good market prices on real estate, but it also includes good mortgage rates as this will determine the mortgage value homebuyers will get approved for and of course, mortgage payments. One of the most common questions professionals in the field get asked is: “When will mortgage rates rise/ fall?” At the moment, with mortgage rates floating near all-time lows, this question is predominantly directed towards the former.

Long-term interest and mortgage rate trends are difficult to predict since they are based on intricate economic factors. Nonetheless, it is possible to anticipate short-term movements quite reliably on your own. Predicting trends in mortgage rates will require some critical thinking and a little bit of research on your part. But, we’ll give you some pointers and nudge you in the right direction.

The first step to understanding trends in mortgage rates is to know what these rates follow.

Variable mortgage rates oscillate because they are linked to the prime lending rate, which is determined by the Bank of Canada. The current prime rate is 3.00%. Variable mortgage rates are set as a discount or premium (-/+) on the prime rate.

Fixed mortgage rates, however, follow government bond yields. Lenders set their fixed rates based on a combination of factors including but not limited to market share, strategy and competition. We’ll go into further detail with both types of mortgage rates to better understand their movements and how you can predict them.

Fixed Mortgage Rate Predictions 

As previously mentioned, fixed rates follow government bond yields of the same term duration. So, 5-year fixed mortgage rates follow 5-year bond yields, 3 year fixed rates follow 3-year bond yields and so on.

Banks will issue their own bonds to fund fixed rate mortgages. However, these bonds will closely reflect government yields with a small ‘spread’ to account for any additional risk. By issuing bonds, the banks are lent funds by the bond buyers. The system is similar to that of stocks. There is guaranteed full repayment with interest by the bank when the term ends.

Then, in turn, the banks will lend these funds back to mortgage borrowers at a higher rate of interest. This ensures that the banks make a return. The interest is higher also because average home buyers are considered to be `riskier` than banks.

A bank can issue 5-year government bonds at 2% interest and then provide a 5-year fixed mortgage rate of 3.5%. The difference between these rates, in this case 1.5%, is known as the ‘spread’. The spread is basically the bank`s net profit (after the cost of borrowing).

Due to this close connection, if bond yields rise or fall, it is likely that mortgage rates will soon follow. By tracking bond yields, you can make informed rate predictions on sites. Sites like Bloomberg have government bond trackers which are useful to follow trends.

Variable Mortgage Rate Predictions

Both fixed and variable rates are based on the same economic factors. However, one key difference is that variable rates are determined by the Bank of Canada prime lending rate. The Bank of Canada can control how these factors are reflected in the prime lending rate and so it can be easier to predict variable mortgage rates.

The Bank of Canada periodically holds interest rate announcements. After each announcement, the Bank of Canada website produces a number of reports commenting on the direction of variable mortgage rates. Bank of Canada research publications can help you stay on top of interest rates.

In addition to these Bank of Canada reports, several major Canadian banks produce reports to help the public predict when the Bank of Canada will move rates. These well-documented reports are a good indication of what the experts believe is going to take place. The following are links to some of these reports by Canadian banks: BMO Economic Research Reports, Scotiabank Market Update, TD Canada Trust Economics,Royal Bank of Canada Market Updates ,CIBC Interest Rate and Exchange Rate Forecast .

Track like a pro

Economic factors influence current mortgage rates in Canada. By keeping an eye on the Canadian economy, you can get a broad indication of the long term trends of interest rates. Plus, the Canadian economy is influenced by international economies. At the moment, the European debt crisis and the United States recovery are both influencing Canadian rates. Even the best economists in the field can find it cumbersome to interpret all the information. By using authorized resources to guide your thinking, you can equip yourself with the tools to closely predict interest and mortgage rate movements, at least in the short term. Tracking bond yields and bookmarking respected industry reports is a good way to start.