Canadian mortgage rates are set by a combination of the Bank of Canada's policy rate, bond market yields, lender margins, and the discount lenders offer off their posted rates. Understanding these forces helps borrowers see why fixed and variable rates move differently.
Canadian mortgage rates are not set by a single authority. Instead, they emerge from a chain of influences: the Bank of Canada's policy rate, Government of Canada bond yields, lender funding costs and margins, and the discount a lender is willing to offer off its posted rate. Understanding this chain explains why fixed and variable rates move differently and why two borrowers with similar profiles can be quoted different rates.
- Policy rate: The Bank of Canada sets the overnight target rate, which influences short-term borrowing costs. Lenders use this to set their prime rate, the benchmark for variable-rate mortgages.
- Bond yields: For fixed-rate mortgages, lenders look at Government of Canada bond yields, especially the five-year bond, because fixed mortgage terms are often funded by selling bonds.
- Lender margins: Lenders add a spread to their cost of funds to cover operating expenses, risk, and profit. This margin varies by lender and market conditions.
- Posted rate and discount: Each lender publishes a posted rate, but most borrowers receive a discounted rate. The discount depends on your creditworthiness, down payment, property, and negotiation.
- Your contract rate: The final rate in your mortgage contract reflects all the above plus your personal circumstances.
The Bank of Canada policy rate and prime rate
The Bank of Canada sets its policy interest rate to achieve its inflation target. When the policy rate changes, lenders typically adjust their prime rate, which is the interest rate they charge their most creditworthy customers. Variable-rate mortgages are usually quoted as prime plus or minus a spread. For example, a variable mortgage might be prime minus a certain percentage, so when prime moves, the mortgage rate moves too. However, the Bank of Canada does not set mortgage rates directly. It influences the cost of short-term money, and lenders decide how much of that change to pass on. You can see the current policy rate and other interest rates on the Bank of Canada's interest rates page.
Why bond yields matter for fixed mortgage rates
Fixed-rate mortgages are not directly tied to the policy rate. Instead, they reflect the yields on Government of Canada bonds, particularly the five-year bond, because many fixed mortgages are funded through bond markets. When bond yields rise, the cost of funding fixed mortgages increases, and lenders tend to raise fixed rates. When yields fall, fixed rates often follow. This is why fixed rates can change even when the Bank of Canada leaves the policy rate unchanged. Bond yields respond to expectations about inflation, economic growth, and global demand for Canadian debt. A lender's fixed-rate mortgage offering is essentially built on top of the relevant bond yield plus a spread.
Lender margins and funding costs
Lenders do not simply pass on their funding costs. They add a margin to cover credit risk, operational expenses, and profit. This margin can vary significantly between lenders. Some lenders have lower funding costs because they have large deposit bases, while others rely on wholesale funding that can be more expensive. The Office of the Superintendent of Financial Institutions (OSFI) regulates federally regulated lenders and sets capital requirements that can influence how much lenders need to hold in reserve, which in turn can affect the rates they offer. Competition also plays a role: in a competitive market, lenders may trim margins to win business, while in a less competitive environment, margins may widen.
Posted rates, discounts, and negotiation
Every lender publishes a posted rate, but few borrowers actually pay that rate. The posted rate serves as a starting point for negotiation. Lenders routinely offer discounts off the posted rate, and the size of the discount depends on your financial profile, the size of your down payment, the property type, and the term you choose. A borrower with strong credit, a stable income, and a substantial down payment may qualify for a larger discount. The Financial Consumer Agency of Canada explains that mortgage rates are negotiable and encourages borrowers to compare offers from multiple lenders. The discount off posted rates is not a fixed number; it changes with market conditions and lender strategy.
Variable vs fixed: different drivers
Variable-rate mortgages are tied to the lender's prime rate, which is influenced by the Bank of Canada's policy rate. When the policy rate changes, variable rates usually adjust quickly. Fixed-rate mortgages, by contrast, are influenced by bond yields. This means that a change in the policy rate might affect variable rates almost immediately, while fixed rates may already have moved in anticipation. Conversely, fixed rates can change due to bond market shifts even when the policy rate is stable. Borrowers comparing fixed and variable options need to understand these different drivers, because the choice involves a trade-off between predictability and potential savings. You can use our loan payment calculator to estimate how different rates affect your payments.
How your personal situation affects your rate
Beyond market forces, your own circumstances influence the rate you are offered. Lenders assess your credit score, income stability, debt levels, and the loan-to-value ratio of the property. A higher-risk borrower may be quoted a higher rate to compensate the lender for added risk. If your down payment is less than 20% of the purchase price, your mortgage is considered high-ratio and typically requires mortgage loan insurance from a provider such as the Canada Mortgage and Housing Corporation (CMHC). The insurance protects the lender, which can sometimes lead to a lower rate compared to an uninsured mortgage, but the insurance premium is added to your mortgage balance. Your rate also depends on the term you choose: shorter terms may have different pricing than longer terms. If you have a co-signer, their credit profile can also affect the rate, as explained in our guide to co-signing. For borrowers with damaged credit, options may be narrower and rates higher; see our page on bad credit loans for related information.
Common mistakes when thinking about mortgage rates
- Assuming the Bank of Canada sets mortgage rates directly. It sets the policy rate, but lenders set their own rates based on many factors.
- Ignoring bond yields when choosing a fixed-rate mortgage. Fixed rates can move even when the policy rate is unchanged.
- Focusing only on the posted rate and not negotiating. Most borrowers can get a discount, but you have to ask or compare.
- Comparing variable and fixed rates without understanding their different drivers. They respond to different market signals.
- Forgetting that lender margins and your personal profile change over time. A rate that was competitive last year may not be today.
Mortgage rates in Canada are the product of a complex interaction between central bank policy, bond markets, lender funding costs, and individual borrower characteristics. By understanding each component, you can better evaluate the rates you are offered and ask informed questions. Comparing offers from multiple lenders is a common step, and some borrowers consult a mortgage professional for guidance tailored to their situation.