What is the basis for increasing mortgage rates?

Find out how to increase mortgage rates effectively. This practical guide gives you tips for success. 

Mortgages are part of the credit granted to individuals. They are specifically designed for anyone who already owns a property. In effect, the lending banks will have a claim on the property and will grant you a loan in return. Although such a practice is highly advantageous and provides a high level of debt capacity over a long period, it is often subject to rising market interest rates. So what factors are responsible for the increase in mortgage interest? Further details will be revealed in the following lines.

Strong economic growth

In principle, the considerable growth in the global economy is helping to drive up mortgage rates. This is particularly true when the economy is strong, as companies are more likely to seek funding from investors. In this way, they can guarantee the development of their business.

Faced with such a situation of economic growth, mortgage lenders tend to offer high interest rates to investors. This is done to encourage them to lend to them, rather than choosing the companies. The phenomenon is quite different when economic growth is slowing down. However, the amounts paid out also vary according to your reputation and the characteristics of your loan:

• Loan term
• Type of loan
• Fixed or variable rate
• etc.

Also, be aware that credit history and certain mortgage characteristics tend to determine the level of risk the lender can take. When the situation isn’t favorable, banks may decide to charge you a high, variable mortgage rate.

Non-repayment and credit risks

Compared with mortgages, the risks are very high for any lender, because loans are repaid before maturity. To alleviate this concern, one of the best solutions is to opt for a good credit rating. This practice lets mortgage lenders know that you’re in good standing when it comes to your debts. They can therefore offer you lower interest rates, unlike a borrower with a poor credit rating.

What’s more, sometimes the total amount of the loans exceeds 80% of the value of the property. In such a situation, lenders may require mortgage loan insurance. Since insurance provides a guarantee against the risk of default, you’ll benefit from a better interest rate. However, borrowers who prefer uninsured loans are obliged to make a higher downpayment to reduce the risk of default.

Prepayment risk

Today’s mortgage lenders are sometimes faced with a special situation. More precisely, some borrowers pay offtheir debts before the end of the repayment term. This situation is known as “early repayment”.

Faced with early repayment, mortgage lenders will no longer be able to profit from their loans. This situation becomes even more alarming when interest rates have fallen considerably since the mortgage was taken out. This is one of the reasons why borrowers face high interest rates when the loan contract authorizes full prepayment. In a closed loan contract, the amount to be repaid early is very limited. The principle here is very simple. The higher the interest rate, the higher the cost of the mortgage.

Inflation fears boost mortgage rates

Since the COVID-19 crisis, mortgage lenders have been very fearful of inflation, which has made it much easier to raise bond rates on loans. Although this is natural, many banks take advantage of this situation.

Indeed, rising inflation is leading investors to be more demanding about the yield on their bonds. This phenomenon is very advantageous for them, as a fall in interest rates is not an option. To calculate mortgage lenders’ real bond yields, inflation must be subtracted from the nominal rate. This will give you the actual rate.

Today, bond market operators tend to fear the loss of their agent. Many of them do not hesitate to sell the bonds, causing their value and yield to fall. Since mortgage rates are based on the bond market, an overall rise in rates pushes up the price of a mortgage.