How Are Mortgage Rates Determined in Canada? A Deep Dive for Homebuyers and Renewers

Mortgage rates can feel like a moving target—especially when you’re trying to buy your first home or decide whether to renew or refinance. One day, you see a lender offering 4.89%, and the next, it jumps to 5.29%. What’s going on behind the scenes? Why do these rates change so often, and who exactly sets them?

In Canada, the answer is rooted in a mix of global financial trends, central bank decisions, and lender risk models. But don’t worry—it’s not as complicated as it sounds. In this article, we break down how mortgage rates are actually set, what factors influence them, and how these rates directly impact affordability and your financial future.

Who Really Controls Mortgage Rates in Canada?

At the core of it all lies the Bank of Canada (BoC)—the country’s central bank. Every few months, the BoC sets something called the policy rate (also known as the overnight rate). This single rate ripples across the entire lending ecosystem, affecting everything from car loans to mortgages.

For variable-rate mortgages, this rate is a direct influence. Most lenders base their prime rate on the BoC policy rate, often adding about 2.2% to it. So, if the BoC policy rate is 5%, most banks will have a prime rate of 7.2%. Your variable mortgage is then priced based on that prime rate—sometimes with a discount (like prime minus 0.5%), sometimes with a premium.

Fixed-rate mortgages, on the other hand, are set using a different benchmark: government bond yields, particularly those that match your mortgage term (like a 5-year bond for a 5-year fixed mortgage). These yields are driven by investor sentiment and market forecasts on where the economy—and the BoC rate—is headed.

Why Mortgage Rates Are Always a Bit Higher Than Benchmarks

Now, here’s the key: lenders never offer you the base rate. Whether you’re getting a fixed or variable mortgage, lenders always add a margin on top to cover their costs, risk, and profit.

Think of it this way: if the government’s 5-year bond yield is 4%, a lender might offer a 5-year fixed mortgage at 5.25% or 5.5%. That spread covers operating costs, loan risks, and the margin they need to remain profitable.

With variable rates, the math is similar. If the BoC policy rate is 4.75%, and the bank sets its prime at 6.95%, your mortgage might be offered at prime minus 0.3%—so, 6.65%.

How Inflation and the Economy Affect Mortgage Rates

Lenders don’t work in a vacuum. The rates they offer are closely tied to broader economic forces—especially inflation.

When inflation is high, the BoC usually raises the policy rate to cool the economy and slow down spending. That trickles down to higher mortgage rates. When inflation is low or the economy is sluggish, the BoC tends to cut rates to encourage borrowing and stimulate growth.

This push-pull dynamic explains why mortgage rates in Canada rise and fall even if your financial situation hasn’t changed.

Fixed vs Variable: What Really Sets These Rates Apart?

The process of setting rates for fixed and variable mortgages is very different, even though both are influenced by the same big-picture forces.

Fixed-Rate Mortgages

These are based on bond yields, particularly Government of Canada bonds that match the term of the mortgage. If bond yields rise because traders expect future BoC rate hikes, fixed mortgage rates go up. If yields fall due to expectations of a slowing economy, fixed rates often drop.

Variable-Rate Mortgages

These follow the BoC policy rate, which influences a lender’s prime rate. Any changes in the BoC rate are reflected almost instantly in variable-rate offerings. So, if you’re holding a variable mortgage and the BoC hikes rates by 0.25%, your rate goes up—usually by the same amount.

Personal Factors That Affect the Rate You Get

Even if two borrowers approach the same lender on the same day, they may not be offered the same rate. That’s because lenders also price in individual risk factors, including:

• Your credit score
• Loan-to-value ratio (how much you’re borrowing vs. the home’s value)
• Property type and use (owner-occupied vs. rental)
• Employment and income stability
• Down payment size
• Relationship with the bank

A borrower with excellent credit and a 25% down payment may qualify for a better deal than someone with bruised credit or a smaller down payment.

How Interest Rates Affect Home Affordability

Here’s where things hit home—literally.

When interest rates go up, borrowing gets more expensive. That means higher monthly mortgage payments and, often, a lower maximum approval amount. For every 0.25% increase in interest rates, you might see your mortgage payment increase by roughly $15 per $100,000 borrowed.

To illustrate:
If you have a $500,000 mortgage over 25 years at 5.14%, you’d pay around $2,964 per month. If your rate rises to 6.14%, your payment jumps to about $3,266—an increase of $302 per month.

This is why rising interest rates tend to cool the real estate market. Buyers can afford less, demand slows, and prices may stabilize or decline.

The BoC Rate Announcement Schedule: Why It Matters

The Bank of Canada sets its policy rate on eight fixed dates every year. These announcements often lead to changes in mortgage rates—especially for variable-rate borrowers.

If you have a variable mortgage, it’s smart to watch these dates closely—they may signal a shift in your monthly payments.

How the Mortgage Stress Test Rate Is Set

All borrowers in Canada must pass a mortgage stress test to ensure they could handle their payments if rates rise in the future. The minimum qualifying rate (MQR) 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 plus 2%

So, if your lender offers you a mortgage at 5.49%, you must qualify at 7.49%.

This buffer protects both you and the financial system from shocks—and is one of the reasons Canada’s mortgage market remains more stable than many others globally.

Final Thoughts: Knowledge = Mortgage Power

Understanding how mortgage rates are set—whether you’re shopping for your first home or renewing an existing loan—gives you a serious edge. Whether rates rise or fall, you’ll know what’s driving the change and how to react.

In a market that’s changing almost monthly, smart borrowers are the ones who ask questions, compare options, and seek expert guidance before signing anything.

---