To get a feel for the development of real estate interest rates, it is important to deal with the refinancing of the mortgage banks. Mortgage banks primarily issue related forms and other forms of borrowing to cover their financing requirements.
Banks need to think in the long term
A mortgage is a long-term liabilities – from the bank’s perspective, it is of course to receivables. Long-term loans are to be covered as long as possible in the interests of adequate risk provision. Banks are therefore often issued with a maturity of ten years. Particularly in low-interest phases, issuers also like to use significantly longer maturities.
The Banks (§ 14) limits the value00 of the collateral of the real estate to be collateral to 60 percent of the value, regardless of whether a mortgage or a basic debt has been awarded. Therefore, the maximum lending limit is the particularly favorable construction loans ever at 60 percent. The overriding part of the loan (for example, 80 per cent or 100 per cent funding) must cover banks through other financial instruments.
The ECB affects the lending rate or not?
Although is often suggested that the interest rates to the Canadian Central Bank (CCB) direct impact on the development has, so this is hardly the case. It is more of a psychological impact – fed by the causes that lead to ECB decisions – than the actual interest rate decisions of the CCB them, which have an effect on the credit market.
As the graph is very nice to see the mortgage rates have checked out in the period 07/2016 until the end of 2017 on the development of CCB interest rates. Already well before the interest rate hike interest rates for five-year interest rates rose by approx. 1.5%. Almost at the same time as the CCB interest rate adjustment of +0.25 per cent, real estate interest rates began a rapid downturn. Only the following adjustment of the CCB by a further +0.25 percent lies before the provisional end of the downward movement and the sideways movement of the mortgage interest.
The image becomes very clear when this development is placed in the context of the present emotional situation. The capital market almost anticipated the interest rate adjustment of the CCB. Investors were unsettled because of the manifold sovereign debt crisis. Capital was withdrawn from the bond markets and invested, for example, in gold or real estate.
How banks calculate the mortgage lending rates
Private or institutional investors indirectly invest in the financing of real estate and land by investing in banks. Savers with credit on the bank do the same, but are eaten with an absolute minimum interest. Those who want to learn more about mortgage bonds can visit the site of the Association of Canadian Banks – a first point of contact.
Banks are financed not only by private residential construction, but also by commercial projects. Bank has a special form of the bond and thus fixed-interest-bearing securities, the interest of which is the calculation basis for the mortgage interest rate of the end customer. Crucial for the development of long-term mortgage interest rates is therefore the interest rate of the bank issued. This, in turn, often based on the “interest of long-term government bonds.
The amount exceeding the 60% limit is the most expensive part of the financing. In addition to higher refinancing costs, the creditworthiness of the borrower and the detailed consideration of the property play a particular role.
In addition to the refinancing costs are now spreads, risk premiums and calculate a profit margin for the bank. Not every bank calculates here in the same way. As before, there are still standardized condition balances with little room for maneuver, in addition to a few personal interest calculations that take account of the individual requirements of the customer and his financing object.
Why “Do it yourself” Interest rate comparisons and simple interest rates make little sense
In recent years, a whole interest-rate industry has emerged. In the meantime, you will find almost no real estate portal, online magazine, finance blog or a daily newspaper that does not offer interest rate comparisons for mortgage loans, mortgage rates and thus suggests to the customer that he would be able to see the best interest rate with just a few mouse clicks.
No credit product is as complex as real estate financing. Countless factors influence the feasibility of the project, the level of the loan value to be applied, the interest rate and finally the effective annual interest rate. And yet is it easy to compare interest rates for a loan of 250,000 dollars with an 80% loan and 2% repayment?
If you underlie a “laboratory situation” in which all parameters are identical, then it is easy. Then these comparisons work. But which house is like the other? Which family have the same personal, financial and professional requirements as the neighboring family? And who would have thought: No institute in Germany rated and calculated in the same way as its competitors.