What affects the mortgage rate?

Knowing helps you make the right decision

By Richard Kluska with Courtney Anderson

As professional Wealth managers, we have witnessed a massive move with interest rates that have affected Canadians in multiple ways. There has been a significant impact of inflation, including housing costs. In this article we focus on mortgage interest costs and the potential trend in future interest rates.

Conventional thought is that interest rates will move down in 2024. The reality is that the speed and amount of interest rate declines are far from certain. We believe that rates will never decline to recent lows, outside of a major financial downturn.

I interviewed business owner Courtney Anderson to provide some insight.

Many Canadians are facing a challenging time with higher renewal rates. What advice do you have for clients?

My advice would be to get a professional working with you. Not all mortgages are created equal. At renewal time there is often a fair amount of flexibility – most mortgages can be moved to another lender who will often offer better rates. The customer has the option of the Fixed Rate Mortgage or the Adjustable/Variable Rate Mortgage. Not all banks work off the same Mortgage Prime Rate. With a good mortgage broker in your corner, Adjustable Rate Mortgages are available for as low as Prime -1.0%. Many banks are still at their Prime Mortgage Prime -0.60%. There can be as much as 0.75% difference.
   After seeing interest rates increase for several months the general consensus by economists and the Bank of Canada is that interest rates will come down. The question is when.

Give us some insight about how mortgage rates are set. We hear the Bank of Canada has held their overnight rate, yet mortgage rates are changing.

There is a combination of factors that impact pricing with the largest factor being the duration of the locked interest rate. For example, the 5-year fixed rate mortgage is tied very closely to the 5-year Government of Canada Bond. Therefore the Adjustable/Variable Rate Mortgages are based on the Bank of Canada’s posted overnight rate or the posted Prime Rate.

Fixed Rate (3-year or 5-year) mortgages are based on the underlying bond rate. As a result we can see Fixed Rate Mortgages move when the Adjustable/Variable Rate Mortgage products do not.

We are seeing many clients taking 5-year Adjustable/Variable Rate Mortgages with the plan to lock into a lower Fixed Rate Mortgage in the second half of 2024 or early in 2025.

What about business owners? Many have challenges qualifying for mortgages and can be forced to pay additional income tax just to qualify.

This is a real gap that has existed in the Canadian mortgage market. The mortgage broker channel has now come to realize this and offered “stated income” criteria for qualifying. This is different from traditional bank lending which is based on taxable T4 income only. Although each lender’s criteria is a bit different, the good news is that there are more choices. Business owners are able to qualify for mortgages WITHOUT having to take more money out of their company. Experienced mortgage brokers have have developed a number of ways to provide a tax efficient solution for business owners and help their children to afford a home.
Many of us worry about the next generation. How will they ever afford to buy their own home?


It is not easy, but with careful planning, home ownership for the next generation can be a reality. You need to start early and take advantage of the multiple government programs available. In 2023, the First Home Savings Account was created which added to the first time homebuyers’ RSP program and Tax Free Savings Accounts. Be sure to investigate this to ensure you are taking advantage of every opportunity.

It is important to know what affects the mortgage rate so the right decision can be made.

As a financial advisor we note that non-deductible debt is very costly. Therefore spending the time to understand the mortgage market with the right professionals can save you thousands of dollars over time.

A sound financial plan with access to financial solutions and products ensures continued success for Canadian investors and homeowners.

Richard Kluska, CIM® is CEO, Director of Family Office, IP Private Wealth. For more information: www.ipprivatewealth.com


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