[Source - Fred Langan, Financial Post]
Mortgages are the biggest loan in just about everyone's life. And they can be the hardest to understand.
Why do mortgage rates move the way they do? Why don't the rates march in lock step with other interest rates?
When the Bank of Canada lowers interest rates the big banks usually play chicken for several hours waiting to see who will drop rates first. At the last cut, the TD Bank was the first to lower prime. The others followed within the hour.
If you had a variable rate mortgage tied to prime, then your mortgage rate moved lower. But all other mortgage rates stayed put.
Why? One pat answer is mortgage rates don't move with prime because mortgages are financed in the bond market.
Not true. Interest rates in the bond market influence mortgage rates, but that isn't where the money for mortgages comes from.
Banks get their mortgage money the same way they get other money: they take in deposits from bank accounts, GICs, etc., and then loan out the money at a higher rate. The difference, or the spread, is how commercial banks make most of their money.
Read Full Article Here: http://www.financialpost.com/money/story.html?id=983179
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