If you follow financial news, it may seem like mortgage rates fluctuate with no apparent pattern. There’s plenty of talk about the housing market, the economy and official interest rates, but it can be hard to understand how these relate to what banks are charging. Although there are many factors involved, a few key metrics influence when and how mortgage rates change.
Mortgage Rate Baselines
When shopping around for a loan, you may notice that the rates are expressed in increments of one-eighth. That means you’ll get a rate set at either a whole number, a number plus 0.125 percent and so on. One of the most basic benchmarks that governs these rates is the yield on a ten-year Government bond. The average payoff period for most mortgages is also ten years, making the trend in bond yields a good comparison.
The bond yield is fairly reliable because investors tend to buy more bonds when they don’t trust the economy. This leads to a lower total yield and lower mortgage rates. The opposite is true when bond sales are low. Complicating the matter is the measure of economic growth performed by the Reserve Bank. If the Reserve Bank decides that growth is too fast, they’ll adjust interest rates upward to keep it stable. When growth is slow, interest rates go down to encourage borrowing.
Trends in the economy can disrupt what would otherwise be straightforward associations between benchmarks and mortgage rates. How economic factors change or are expected to change influences how secure people feel and how much money they’re willing to spend.
Developments in any of these economic areas can influence mortgage rates:
- Gross domestic product
- Consumer price index
- Consumer confidence
- Stock market fluctuations
- Home sales and housing availability (Hello Auckland!)
- Money supply
- Unemployment rates
World events, such as shifts in the economic activity of influential countries and large-scale natural disasters, may also impact what percentage banks charge on mortgage loans.
In general, when there’s more money available for any reason, rates will be lower. A larger supply of money sometimes indicates a slow economy, and lower interest rates are seen as a way to increase consumer confidence. Mortgage-backed securities also put more money into the hands of lenders, and when the government buys up these securities, it provides a guaranteed source of funds that brings interest rates down.
The final piece of the mortgage rate puzzle is specific to your circumstances and preferences when seeking a loan. Your credit score and the size of the down payment you’re able to make can influence how much the bank charges you. Associated fees and payment adjustments also change the cost of the loan.
Different loan types and structures may be tied to different benchmarks, making the rates even more uncertain. For example, floating-rate mortgages may be related to the Reserve Bank official cash rate and also be influenced by the London Interbank Offered Rate. Fixed-rate mortgages are better assessed by looking at the Treasury bond yield. Banks may also price mortgages using structures designed to attract prospective home buyers.
Understanding these factors can help you make better decisions when looking for a mortgage loan. You can base the type of mortgage you get on whether underlying factors in the economy, the government and the world are likely to drive rates higher or lower in the near future. It’s not possible to predict exactly how rates will respond, but when you know what to look for, you have a better chance of securing a mortgage with a favorable rate.