How Are Mortgage Rates Determined in Canada?

Ever wonder why your mortgage rate is what it is? Whether you’re looking at a fixed or variable mortgage, the interest rate you’re offered isn’t pulled from thin air — it’s based on a combination of market forces, policy decisions, and personal financial factors.
In this guide, we’ll break down exactly how mortgage rates are determined in Canada, what influences them, and how it affects your home-buying power.

Mortgage Rates: What Sets Them?

Mortgage rates in Canada are influenced by two main forces:

• Variable rates follow the Bank of Canada’s (BoC) policy rate.
• Fixed rates are linked to Government of Canada bond yields.

Lenders add a margin to these benchmark rates to cover costs and risks. That’s why your mortgage rate is always a bit higher than the BoC rate or bond yield.

For instance:

• If the BoC policy rate is 4.50%, lenders typically set a prime rate around 6.70%.
• A 5-year variable mortgage might be quoted as prime – 0.50%, which would be 6.20%.
• A 5-year fixed mortgage might be priced 1–2% above the current 5-year bond yield.

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Who Sets Mortgage Rates in Canada?

The lenders themselves — banks, credit unions, and private institutions — set the actual mortgage rates you’re offered. But their rates are based heavily on:

• The BoC policy rate for variable mortgages
• Bond yields for fixed mortgages
• Your credit score, income, down payment, LTV ratio, and relationship with the lender

Even though rates start with a benchmark, they’re tailored to each borrower.

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The BoC’s Role: Setting the Policy Rate

The Bank of Canada meets 8 times a year to review the economy and decide whether to raise, lower, or hold the overnight policy rate. This decision directly impacts variable mortgage rates.
Why does it matter?

• When inflation is high, the BoC raises rates to cool the economy.
• When inflation is low or the economy is sluggish, it lowers rates to stimulate borrowing and spending.

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Fixed Rates: Why Bond Yields Matter

Bond yields reflect investor expectations for inflation and BoC rate decisions. When investors think rates will rise, bond prices fall and yields go up — pushing fixed mortgage rates up. When expectations cool, bond yields drop — and fixed rates usually follow.
So even though the BoC doesn’t directly control fixed rates, it still influences them through market expectations.

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How Interest Rates Shape Affordability

Rising interest rates = higher monthly mortgage payments = reduced affordability.
Falling rates = lower payments = increased affordability (but usually more competition).
That’s why even a 1% change in mortgage rates can have a big impact on what kind of home you can afford — or qualify for.

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What Happens When Rates Fall?

Lower rates encourage borrowing and home buying. But they also push up demand, which can drive home prices higher. This can offset the benefits of cheaper borrowing.
Economically, low rates stimulate the economy but can also lead to inflation if demand outpaces supply.

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What Happens When Rates Rise?

Higher rates cool borrowing and slow the economy. That can reduce home prices but also make mortgage payments tougher.
If rate hikes come too fast, it can lead to a recession. That’s why the BoC adjusts rates cautiously, aiming to bring inflation down without stalling growth.

What About the Mortgage Stress Test?

To protect borrowers, Canada uses a mortgage stress test. It requires lenders to assess if you can handle payments at a higher interest rate.
The stress test rate is:

• Either 5.25%, or
• Your contract rate + 2%, whichever is higher.

This ensures you can still manage your mortgage if rates increase — or if your financial situation changes.

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FAQs: Mortgage Rate Determination

What’s the difference between fixed and variable rate influences?
Fixed rates are influenced by bond yields. Variable rates follow the BoC’s policy rate and lender prime.
How often can mortgage rates change?
Bond yields change daily, so fixed rates can change anytime. Variable rates change when the BoC adjusts its rate (8 times a year).
Why don’t rates fall as fast as they rise?
Lenders tend to increase rates quickly when markets shift but are slower to reduce them — to manage risk and maintain profit margins.

Final Thoughts: Why This Matters for You

Whether you’re getting pre-approved or renewing your mortgage, knowing how rates are set helps you ask smarter questions and make better choices. Stay informed about BoC announcements and bond yield trends — they’re the early indicators of where rates are heading.
Want help locking in the best rate or deciding between fixed and variable?
Connect with our team of mortgage experts for personalized advice.