Understanding The Reasons Why Banks Raise Mortgage Rates
2019-06-08 Jun 8, 2019
Banks may probably be a convenient way to get a loan. However, you have to have good credit ratings for them to even consider you as a potential borrower. Banks have lately raised their fixed mortgage rates due to changes in the property market. The reasons why the mortgage lenders are increasing their rates are varied.
Change in mortgage policies
There was a recent policy change by the government regarding mortgages. As the prospective home owner, you need to make a bigger down payment on the house. Before, it was a requirement to pay 5% of the total house worth. Now you will have to cough up some more money, up to 10% of the house worth. This is for properties above $500,000, but stays at 5% for properties under $500,000. The government also introduced stringent measures that make it hard for private mortgage companies in Mississauga to operate. This in turn means that most of the times, you end up paying higher interest rates when you go with a bank. If you take a longer mortgage, you will end up paying more in rates than those with a shorter one!
Bond market trends
When bond yields go up, then the rates are sure to go up. The selling off of bonds in the market makes it hard for the banks to come by cash. The bond market is where the banks get money to lend to borrowers over a long term period. Bond yields and prices go together, meaning when prices go up, the yields go down and rates go up too. If anything happens to trigger the market, the bond prices either shoot up and down in a matter of hours.
Increased lending rates
When the government makes it harder for lenders to lend by increasing the lending costs, banks pass on the costs to the borrower. An increase in interest rates indicates a rise in borrowing costs. This leads to a drop in the economy as people spend less and unemployment levels go up. A bank can take action on rising lending rates by reducing discounts or increasing the premium mortgage rate. There have been several rules passed by the government and this may also play a part. The government has sought to seal loopholes used by foreigners to avoid paying taxes. This was also an effort to cool the housing market. The mortgage rates ultimately go up as a result of increased capital requirements or the insurance restrictions set out for defaulters.
Politics of the day have a lot of influence on how the market fluctuates. The change in a certain status quo makes people uncertain about the future. This is especially in the bond market where bond markets anticipate changes and react to the expectation of inflation. The unrest goes on, with bonds dropping until the political scene stabilizes. In this kind of set up, the banks react accordingly and raise their rates to suit the political climate. The housing market is an extremely fluctuating market. Prices and rates go up and down almost every other day. The banks can increase their rates for varying reasons. Mostly the rise comes about as policies change and their lending costs go up. The costs then trickle down to the lender by rates going up. A lot of these things are interrelated and one action triggers a reaction. Everyone wants to own a home. Taking out a mortgage that you can pay off over a long period of time is an easier way to own a home. As long as you are able to keep up with the payments, then it is enough time to pay off the loan. In the course of those years, things are bound to change, inflation and rates going up and down. In the long run, you will end up owning your home, through sheer hard work and good choices.