Markets · 6 pages · 12 min
Why the policy rate is not your mortgage
A mortgage rate is a long retail loan rate, not the overnight wholesale rate the central bank targets.
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From the opening
The policy rate is an overnight wholesale rate among banks, while a mortgage rate is the rate on a long-term loan to a household, secured by a house and priced by lenders in a retail market. The two can move on the same day, and they are not the same contract, the same maturity, or the same risk. The opening covers overnight wholesale versus long retail, fixed coupons do not reset themselves, and term premium can move alone.
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Inside
- Overnight wholesale versus long retail
- Fixed coupons do not reset themselves
- Term premium can move alone
- Adjustable loans still add a margin
- Where the idea stops applying
- A distinction worth keeping
Sources
- Mortgage rate spread
- Federal funds rate target