How do tariffs and bond rates affect mortgage rates?
In: Economics
There’s really 2 questions here, and we have to take them separately.
How do tariffs affect mortgage rates? Not much. A tariff is a tax on imports. Usually, countries only put tariffs on physical goods (things you can drop on your foot), and do not put taxes on services or financial products. It’s also very rare, outside of the EU, for anyone to have a home mortgage that follows foreign law (and it’s only practical in the EU because EU nations spent decades coordinating their financial laws). If a nation had really ridiculous tariffs that massively distort the national economy (think Great Depression, not Donald Trump), then that could move mortgage rates, but at that point, a dozen other things are going wrong.
Now bond rates, those are tied to mortgage rates. The main way that banks make profits is by (1) collecting money deposits, then (2) loaning that money out to debtors, while (3) charging more to loan out the money than they have to pay the deposit-holders, and (4) trying to get their debtors to pay back those loans instead of defaulting or going bankrupt.
So WHO should the bank lend money to? Well, four options come to mind. The least risky would be to loan it to the national government (that’s the least risky option because usually, if the government can’t pay its debt, then things are so screwed that the citizens can’t pay their debts either). That’s a government bond, and because it’s not risky, banks demand pretty low interest rates when they offer to buy government bonds. The most risky is unsecured credit — that’s the market that credit cards and payday loans are in, and that’s why they demand really high interest rates.
Somewhere in the middle are corporate bonds and mortgages. There’s a line of business, Credit Ratings Agencies, whose job is to figure out exactly how risky corporate bonds and mortgages are. The more risky a loan seems, the higher the interest rate that banks will demand. **The difference between the rate that banks ask for a bond/mortgage and what they ask for a government bond is called the “risk premium.” If the government interest rate goes up, then the rate for new bonds/mortgages has to go up by the same amount, because the risk premium of lending to that company or homeowner didn’t change.**
In most countries, the government offers banks some safeguards with the home mortgage market, to keep the risk premium both low and stable. If you fiddled with those safeguards, you could change the risk premium for mortgage rates without changing bond rates. Also, if City X is a really attractive place to live, banks might need a lower risk premium for mortgages in City X, because the bank knows that City X’s houses will get more valuable. Sometimes the entire market for housing becomes more risky all of a sudden — like the 2006 USA Housing Crisis, and there’s plenty of other people on Reddit who have explained THAT one better than I can. But when the economy is boring and stable, the risk premium stays stable, and it’s the flutters in the government bond market that cause the mortgage rates to flutter.
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