How Are Mortgage Rates Determined in Canada?

Ever wondered why your mortgage rate is what it is? In Canada, mortgage rates are primarily influenced by a few key players—namely the Bank of Canada, bond markets, and your personal financial profile. Whether you’re shopping for a new home, refinancing, or just curious about why rates fluctuate, understanding what determines mortgage rates can help you make smarter decisions.
Let’s walk through how mortgage rates are set, what influences them, and what that means for you.

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Who Sets Mortgage Rates in Canada?

Mortgage rates aren’t pulled from thin air—they’re based on economic factors and risk calculations. Banks and lenders set their own rates, but they take cues from larger market forces.
Variable mortgage rates are directly tied to the Bank of Canada’s (BoC) policy rate. When the BoC changes this rate, lenders adjust their prime rate, which influences variable-rate mortgage products.

• Fixed mortgage rates are guided by bond yields, especially government bonds of matching terms (like 5-year bonds for 5-year fixed mortgages). These yields reflect what markets expect the BoC to do in the future.

Of course, lenders then add a “markup” to cover risk and profit. That’s why your mortgage rate will always be a bit higher than the policy rate or bond yield.

What Influences Mortgage Rates?

1. Economic Conditions

The biggest driver of mortgage rates is the state of the economy. When inflation is high, the Bank of Canada raises the policy rate to cool spending. When the economy slows, it lowers the rate to stimulate borrowing and growth.

2. Bank of Canada Policy Rate

This is the benchmark interest rate. It impacts how much banks pay to borrow money, and in turn, what they charge you to lend it. Lenders usually set their prime rate about 2.2% higher than the BoC policy rate.

3. Bond Yields

Bond yields go up when investors expect inflation or rate hikes. That’s why fixed mortgage rates often rise before the BoC announces anything—they’re based on market expectations.

4. Your Personal Profile

Your credit score, down payment, income, loan-to-value ratio (LTV), and the property you’re buying all affect the final rate you’re offered. The better your financial profile, the more likely you are to qualify for discounted rates below a lender’s posted rate.

Fixed vs Variable: How Are Rates Determined?

Fixed-Rate Mortgages

These follow the trend of government bond yields for the same term length. For example, if 5-year bond yields rise to 4%, expect 5-year fixed mortgage rates to fall between 5%–6%.
Fixed rates offer payment stability, but they are also influenced by trader speculation. If bond yields rise, it’s usually because traders expect higher inflation or future BoC rate hikes.

Variable-Rate Mortgages

These are pegged to your lender’s prime rate, which in turn follows the BoC policy rate. If the BoC raises its rate, variable mortgage rates typically increase by the same amount.
Some lenders offer rates like “prime – 0.5%” or “prime + 0.25%” depending on your application profile.

How Interest Rates Affect Home Affordability

Higher interest rates mean higher monthly payments, which can reduce your borrowing power.
Let’s say you have a $500,000 mortgage over 25 years:

• At 5.14%, you’ll pay about $2,964/month
• At 6.14%, that jumps to about $3,266/month

Just a 1% hike adds over $300/month to your payments.
Lower interest rates do the opposite—they increase affordability and buying power by reducing monthly mortgage payments.

Impact of Higher Interest Rates

• Slows down borrowing and homebuying
• Reduces inflation but increases the cost of loans
• May lead to a housing market cooldown

Impact of Lower Interest Rates

• Encourages borrowing and boosts home affordability
• Stimulates economic growth
• Can overheat the market and spark inflation

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Mortgage Stress Test: How It’s Calculated

Before you can qualify for a mortgage, you must pass a stress test. The qualifying rate is set by the Office of the Superintendent of Financial Institutions (OSFI) and is the greater of:

• 5.25% (the “floor”) or
• Your contract rate + 2%

This ensures you can still afford your mortgage if rates rise in the future.

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Bank of Canada 2024 Policy Rate Announcement Dates

Stay informed—this schedule can directly impact your variable rate or prime-linked loan:

• Jan 29 Interest rate announcement and Monetary Policy Report
• Mar 12 Interest rate announcement
• Apr 16 Interest rate announcement and Monetary Policy Report
• Jun 4 Interest rate announcement
• Jul 30 Interest rate announcement and Monetary Policy Report
• Sep 17 Interest rate announcement
• Oct 29 Interest rate announcement and Monetary Policy Report
• Dec 10 Interest rate announcement

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FAQ: Mortgage Rate Basics

How are mortgage rates set?
Fixed rates follow bond yields. Variable rates follow the BoC policy rate via prime rates set by lenders.

Which is better—fixed or variable?
It depends on your risk tolerance. Fixed offers certainty, variable may offer lower rates short-term.

What affects my individual mortgage rate?
Credit score, income, down payment, and type of home. The better your profile, the better your rate.

How often do rates change?
Fixed rates move with daily bond market changes. Variable rates usually change when the BoC makes an announcement.

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Final Thoughts: Be Rate Smart

Understanding how rates work can save you serious money over the life of your mortgage. While no one can predict exactly what rates will do next, knowing what influences them gives you the power to plan better and borrow smarter.

Whether you’re buying your first home, refinancing, or renewing, always compare rates, understand the fine print, and speak to a mortgage expert who can tailor options to your goals.