Mortgage rates and how they are defined

Variable rate mortgages usually work better than to fix your mortgage in a declining interest rate market.

As we have seen benchmark interest rates increased in 2 out of 2 of the last Bank of Canada's meetings, the tide has now turned and it may be advantageous to now lock in your mortgage.

A 5 year fixed rate mortgage can be had at a shade or two under 4 points. Interestingly enough, fixed rate packages have been recently on the decline as variable rate mortgages have been on the incline this year.

The variable rate is set and calculated against the banks prime lending rate. Bank prime lending rates are directly affected by the Bank of Canada's overnight lending rate. It is this "overnight" rate that is used as the interest rate that banks charge eachother to cover their short term daily transactions. As the Bank of Canada raises its key interest rate, this in effect increases the banks cost of borrowing through short term daily transactions which in turn increases their prime lending rate (as it is these "short term daily transactions" that the banks borrow money for variable rate product). Then of course the cost of borrowing rises for consumers who take on variable rate products.

Essentially fixed rate mortgages are affected by the yielding rate on bonds. The banks rely on the bond market to raise money for these kinds of mortgage applications. So essentially because bond yields are at lower lows, the base rate for fixed rate mortgages are currently sitting at near all time lows.

Banks are in business to make profit. Their commodity is money. They purchase money at rates that are cheaper than they can loan the money out at. Essentially, they pay their depositors low rates of interest on their bank accounts, term deposits, and GIC's and lend out at higher interest rates through mortgages.

A government of Canada bond represents a risk free investment to the banks. When the banks decide to load money for a mortgage, they are taking on risk with their capital (our deposits) and covering expenses to set up and service the loan. As prudent business practice, they will set their mortgage rates high enough above the equivalent bond yield to supplement their business practices for their costs and provide them with a profit margin for the added risk they take on or services that they provide.

Edmonton housing market marked by high inventory

While the summer temperatures rose in July, housing prices cooled and prices for all types of residential properties dipped slightly according to figures released by the REALTORS® Association of Edmonton. Single family dwelling prices slid 3.1% while condo prices were down 1.5% and duplex/rowhouse prices dipped just less than one percent. The all-residential average price dropped just 1.7%.

"The number of homes in the inventory is giving buyers' choice," said Larry Westergard, president of the REALTORS® Association of Edmonton. "As a result many buyers are taking their time and prices are beginning to soften slightly. At the same time, some sellers who have been standing firm have been pushed to discount their initial list price." Less than half of the active listings over 30 days have had a price reduction. However, 93% of July sales sold below the list with about 40% having already taken a price reduction.

Single family homes sold on average* for $378,979 in July; a reduction from the previous month but up 1.5% from what they sold for last year. Condominiums dropped in price slightly in July moving down about 1.5% from June. The average condo price was $240,371 in July. The duplex/rowhouse average price was also down 0.9% to $304,032 and the average residential price (including all types of residential property) was down 1.7% since last month at $329,734.

The large inventory of 8,892 residential properties available at month end dampened both listings and sales. New listings were off 15% from last month and 3.3% from last July. Sales dropped from 1,741 in June to 1,294 in July (a 15% drop). The sales-to-listing ratio was 43.8% (down from June). As you might expect, sales were also slower and the average days-on-market was up 4 at 51 days. "A well presented property with the right price might still attract multiple offers," said Westergard. "Most buyers are receiving the expert advice of their REALTOR® and getting access to day-to-day changes to numbers and sales results. It is critical that sellers remain in contact with their REALTOR® and be prepared to modify the price as the market moves." Residential inventory is expected to follow a seasonal trend and fall through the latter part of the year leading to a more balanced market and price stability.