Interest rates have a direct effect on mortgages. The higher the interest rate, the more expensive the monthly mortgage payment. Because of the debt/income ratio that is one of the determining factors in granting a mortgage loan, higher interest rates lower the amount the lender can grant (or the amortization period must be increased, upping the amount of interest versus principal the mortgage holder will pay over the lifetime of the mortgage). Interest rates also influence actual housing prices a high rate depresses the market because fewer people can afford the higher mortgage payments, on the other hand, low interest rate causes an influx of first time real estate buyers who bump up real estate prices.
For example, a current Ottawa mortgage of $100,000 with a 25 year amortization at 5% will have a monthly payment of $581 and cost $74,459 in interest (assuming the interest rate remains the same over 25 years). In contrast, 1980’s Otatwa mortgages of $100,000 with the same 25 year amortization at 20% had a monthly payment of $1,614.95 and would have cost $381,734 in interest if rates had stayed that high.
The interest rates that a lender charges depend on several things; the prime rate set by the Bank of Canada, direct competition from other lenders, and the credit rating of the person applying for the mortgage. The better the credit rating, the lower the interest rate the lender will offer, as the risk factor is perceived as being less, giving the applicant more mortgage options. Because mortgage brokers have access to every lender, they are usually able to get the best interest rate for a mortgage seeker.