Wth..is that going to ultimately affect my mortgage payment. How do mortagages work?

Okay, so this isn't the sexiest dialogue...but I still seem to get a ton of questions about interest rates and mortgage rates. I figured in my shortest blog entry I would oversimplify the explanation:
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VARIABLE RATES:

We have short term rates and long term rates.
Bank of Canada decides on the discount rate (prevailing interest rates)
This rate is determined by risk of inflation vs growth prospects vs strength of dollar amongst other things
When B of C increases interest rates, chartered banks may lift their "prime rates".
Banks offer variable rate mortgages which use prime rate

So lets suppose B of C is worried about containing inflation then they may raise the
discount rate.
Then banks may lift prime rate
Then variable/floating rate mortgages may rise (prime rate plus a premium)
If you have a variable rate mortgage and rates go up..this will offset the amount of your payment that goes towards principal vs interest. Of course, your interest is for as much of you payment to go towards principal so you like low rates.

FIXED RATES:

Conversely, fixed mortage rates like the 5 year fixed rate that guarantees a specicif rate for 5 years is subject to change as well due to many factors.

Suppose, investors believe that the economy is going to start clipping along. Their appetitie for safety falls. Bond holders holding 10 year notes and collecting interest may decide to sell their bonds and move that money into the stock market. In doing so because their bonds may suffer from a lowered interest rate, the bondholder needs to sweeten the deal. How? They offer a discount on their bond which kicks up the yield for a new investor to grab hold of.

Now when yields go up in the long term bond market...this isn't great for banks who loan money out (mortgages). Now the banks borrowing costs when they sell bonds has gone up. To match and ensure that they make money on their loan portfolio, an increase in borrowing rates will ultimately lead to an increase in rates the bank will offer on mortgages.

SO variable rates are subject to change and fixed rates are subject to change.

What changes either is different.

Again, I'm not an economist. I am a realtor. If your economist says I'm a lousy make believe economist....I'm comfortable with my abilities to move real estate, so no worries.

Hope this clarifies.

Michael Gruenstein MBA CSC
http://www.TheSmithsBuyAHouse.com
http://www.PropertiesintheGTA.ca