Mortgage rates not completely linked to Bank of Canada moves

Dear Chris,

I'm close to buying my first apartment. A couple weeks ago you reported that the Bank of Canada was leaving rates unchanged. According to my mortgage broker, rates have actually jumped higher. What gives?

-- Lucille, Surrey

Dear Lucille,

Although the Bank of Canada's trend-setting rate is the most watched and talked about interest rate, it is not necessarily the most useful indicator of changes to longer-term mortgage rates.

As implied, the Bank's overnight rate influences the interest that financial institutions charge each other for one-day loans. Even though the Bank of Canada rate affects things like exchange rates and consumer borrowing rates for shorter-term obligations -- for example, lines of credit or demand loans -- it will often have little effect on longer-term mortgages. In many cases, short-term mortgage rates will adjust higher or lower before the Bank's official decision is announced as the market anticipates its next move.

Longer-term mortgages, such as the five-year, fixed-rate option will follow the direction of the Canadian bond market, where your bank borrows the money to lend back to you. Since March, the yields on five-year bonds have jumped by about half a percentage point, even though the Bank of Canada's trend-setting rate hasn't changed in more than a year.

When our central bank suggested two weeks ago that it was considering raising rates to slow economic growth and temper inflation, the bond market immediately priced in the greater chance of a rate hike. This pushed retail mortgage lenders to bump up rates to borrowers like yourself. Most institutions raised five-year mortgage rates by about three-tenths of one per cent.

(prepared by Chris Carter/Vancouver Province)