Recently, the Bank of Canada announced that the prime lending rate would not be changed, although, they hinted at an increase in July. It’s not like the government would ever lie, right?


Change or no change, I have to stress: get a mortgage pre-approval if you are thinking of buying a home in the future.


I will start by giving you a brief explanation on how the prime lending rate affects the housing market. There is a common misconception that the prime rate is tied to mortgage rates. This is entirely incorrect. The prime rate can indirectly impact mortgage rates, but they are not tied together.


Many people have been waiting for an announcement from the Bank of Canada as they assumed that a raise in the prime lending rate would in turn raise the mortgage rates, and thus their ability to buy real estate might be affected.


A raise in prime could affect mortgage rates, but not necessarily, and not immediately.


The mortgage market is based entirely upon the bond market, and the bond market is impacted by many things. For example, there is an interesting relationship between the stock market and the bond market. If the stock market is hot and people are making money, they may not seek out the bond market as an investment vehicle. When the bond yield rises, so too does the five-year-fixed mortgage rate. This is the relationship we are interested in!


So if the prime lending rate is raised from 2.25% to 2.50%, will the five-year-fixed rate mortgages jump from (approx) 3.69% to 3.94%? No, they won’t. But in time, if the bond yields rise, then so too will the mortgage rates.


As a Mortgage Agent, I am able to lock in a rate for 120 days after doing a mortgage pre-approval. So, if the Bank of Canada did raise rates 50 basis points, and the shakeout from the financial markets did impact mortgage rates, a buyer who was pre-approved before it all went down would get to keep the lower rate!


I’ve asked the rhetorical question before: “How can you know what to look at when you don’t know how much you can afford?”  The mortgage pre-approval will tell you which doors to enter.


So the question becomes, why not get pre-approved?


You might ask, “Who cares about service? I only care about the rate.” Some buyers will just take the posted rate their financial institution offers because they have been a client at the bank for years, trusts that the bank really cares and do not want to leave their comfort zone. They also deal with “any” Agent at the bank who arranges Car Loans, RSP’s, Mortgages, etc. Jack of all trades, master of none?


Whether you’re a first-time home buyer or a seasoned home buyer, you need somebody at the top of the mortgage game to guide you through the process not only for a competitive rate but for service.


Information Note: The next scheduled date for announcing the overnight rate target is April 20, 2010.


Tanya Miedema, Mortgage Agent, Unisource Mortgage

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