How do lenders and banks come up with the fixed rate?

Calculating fixed mortgage rates involves a combination of various factors, and the specific method can vary among lenders. However, the primary factors influencing fixed mortgage rates include government bond yields, the lender's cost of funds, economic conditions, credit risk, and the lender's profit margin. Here's a general overview of the process:

1. Start with the Government Bond Yields:

   • Lenders often tie fixed mortgage rates to the yields on government bonds. The most common benchmark is the Government of Canada bond yield for a term that approximates the mortgage term (e.g., 5-year fixed mortgage rates might be influenced by the 5-year Government of Canada bond yield).

2. Add the Lender's Margin:

   • Lenders need to cover their costs and make a profit. They add a margin, or spread, to the government bond yield. This margin is influenced by the lender's operating costs, risk tolerance, and profit goals.

3. Consider the Cost of Funds:

   • Lenders have costs associated with obtaining the funds they lend. This includes interest paid on deposits and other sources of capital. The cost of funds can vary among lenders and is factored into the overall rate.

4. Adjust for Economic Conditions:

   • Lenders consider the broader economic environment when setting rates. Economic factors such as inflation, employment, and overall market conditions can influence the level of risk associated with lending, impacting the final interest rate.

5. Account for Credit Risk:

   • The creditworthiness of the borrower is a significant factor. Lenders assess the risk of default based on the borrower's credit score and financial history. Borrowers with higher credit risk may be offered higher interest rates.

6. Incorporate Profit Margin:

   • Lenders build in a profit margin to cover their business costs and generate revenue. This margin is added to the other factors, contributing to the final fixed mortgage rate.

It's important to note that this is a simplified explanation, and the specific calculation may vary among lenders. Additionally, fixed mortgage rates are typically set for a specific period, such as 5, 10, or 30 years, and may be influenced by market conditions at the time of renewal.

For accurate and up-to-date information on fixed mortgage rates in Canada, it's recommended to consult with individual lenders or speak with a mortgage professional who can provide personalized advice based on your financial situation and objectives.

Contact the Ottawa Mortgage Shop we would be happy to discuss this further with you.