What are the economic factors that affect mortgage rates?

Posted on by swiggs

This is an article that is something that will hopefully help you more understand why the dam interest rates go up or down, usually we only complain when they go up, as this directly costs us more money. Although written with a slight US feel, with the words federal, the principles are the same which is why i’d like to share this with you.
Mortgage rates are linked to the trends in financial markets and changes in economy. There are a number of factors that determine the home mortgage rates. The interest rates on home loans are affected by stocks, treasury notes and bonds, inflationary trends, actions of the federal government, international forces, etc. It is better to have an understanding of the changes that affect the loan rates before applying for a home loan.
Here are some of the factors that determine the interest rates on mortgages:

  • Federal Reserve discount rate: Federal Reserve Discount Rate is the cost that banks and other financial institutions are charged for borrowing money from Federal Reserve Banks. When Federal Reserve Banks increase the discount rate, it becomes expensive for investors to obtain money and hence they are not able to borrow much. As a result of this, the investors/lenders (banks and financial institutions) increase the rates they charge their customers for home loans.
  • Inflationary trends: Inflation reduces the purchase power of money and so lenders increase the interest rates on home loans during inflation. On the other hand, deflation tends to reduce the interest rates.
  • Stock market: The stock market plays an important role in determining the home mortgage rates. The stock market fluctuations affect the credit supply in financial markets and this in turn affects the home loan rates. As stocks go up, more money is invested in stocks. More investment may lead to less money invested on mortgage backed securities and this would increase interest rates on mortgages.
  • Treasury notes and bonds: The government often sells mortgages (packaged together with treasury notes and bonds) to investors. These are issued in financial markets as mortgage-backed securities. A higher demand for treasury bonds lowers the home loan rates.

There are certain other factors that affect the home loan rates. If international/ foreign investors put in money in the domestic financial market, the rate of interest on mortgages decline. Major fluctuations of dollar in foreign exchange market also affect the home mortgage rates.

5 thoughts on “What are the economic factors that affect mortgage rates?”

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