One of the most critical decisions to make when you want to a home is to time the interest rates exactly right. Those who think rates will increase want to buy sooner and take advantage of currently lower rates, and those who think they will decrease want to wait until a more opportune time.

What determines interest rates depends on many factors, so knowing what they are and how they behave can help you make your decision. If you look upon interest rates as the price of money, and understand that factors like supply and demand influence all prices, you can see how the “price” of money can even have an effect on your mortgage.

The first factor to examine in terms of interest rates is the inflation rate. There are two major things to watch when it comes to inflation. The Producer Price Index and the Consumer Price Index are the primary two factors.

PPI is the measure of change in prices in a given length of for goods at the production level. If the prices of raw products increase, you can be sure prices in general will go up.

CPI is the benchmark of the change in prices at the consumer level, measured as a group of goods. Most people are more familiar with CPI since it more directly affects what they pay for goods. The so called “basket of goods” used is consistent so that economists can see how prices change, but because food and energy are included, they are often eliminated to reduce volatility. The volatile segments of food and energy can affect the inflation rate, while core inflation will give a better measure if overall prices are increasing, causing inflation.

Gross Domestic Product is another inflation, and therefore interest rate, indicator. Central banks aim at slow, steady growth in the economy, since zero growth means recession, and too fast growth means inflation. The Fed has the tools to intervene in the economy in a number of ways so that it can decrease rates to slow the economy down and increase them to speed it up.

The next very important interest rate indicator is the unemployment level. If the economy is experiencing low unemployment, inflation will most likely follow since salaries have to go up to bring in candidates. If unemployment is high, the resulting decreased wages will mean lower inflation. This is known as the wage price spiral; increased wages lead to increased prices, decreased wages to decreased prices.

If you are considering a loan, it is to your advantage to watch these indicators to target the best timing to enter the loan market. The bigger picture to watch out for is a lower GDP with unemployment which leads to lower rates. On the other hand, increasing GDP and lower unemployment will mean an increase in interest rates.

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