What Makes Mortgage Rates Go Up or Down in Canada? (2025 Explained Simply)

You see headlines every week: ‘Mortgage rates hit new highs!’ or ‘Bank of Canada pauses rate hikes!’ But what does it really mean for someone trying to buy a home or refinance?

Let’s break it down in plain English. If you’re wondering why your mortgage rate changed between your pre-approval and final offer, or why rates are suddenly rising again in 2025 — this guide will explain it all simply, like a smart friend walking you through it.

The Real-Life Impact of Changing Rates

Meet Priya. She got pre-approved in February 2025 at 4.25% for a 5-year fixed mortgage. By April, rates had jumped to 5.15%.
That 0.90% difference might seem small — but over a ₹50 lakh mortgage, it means over ₹4,500 more in EMI every month. That’s a car payment!
Why did this happen? The answer lies in a few key factors — let’s decode them step by step.

What Affects Fixed Mortgage Rates?

Fixed mortgage rates are tied to the bond market — especially 5-year Government of Canada bond yields. When investors think inflation will rise, they demand higher returns on bonds. And lenders pass those costs onto you via higher fixed mortgage rates.

The Bond Yield Connection

Lenders don’t just pull mortgage rates out of a hat. They price them based on bond yields — especially the 5-year ones. Here’s the basic flow:
Rising bond yields = Rising fixed mortgage rates
Falling bond yields = Cheaper fixed mortgage rates
So even if the Bank of Canada hasn’t changed its rate, fixed rates might still climb if bond yields do.

What Drives Variable Mortgage Rates?

Variable mortgage rates work differently. They follow the prime rate, which is influenced by the Bank of Canada’s overnight rate.
If the Bank of Canada hikes its rate to control inflation, lenders typically follow with a higher prime rate — and your variable rate floats right along with it.

Role of the Bank of Canada & Prime Rate

The Bank of Canada (BoC) doesn’t set mortgage rates directly — but it has a powerful ripple effect.
Its policy rate (overnight lending rate) influences all lending in Canada. When inflation rises, BoC may raise rates to cool spending. That makes borrowing more expensive — including mortgages.
In 2022–2023, we saw aggressive hikes due to post-pandemic inflation. By 2025, the BoC has paused hikes but uncertainty remains. Even the hint of a future hike can drive rates up.

Lender Risk and Spread

Lenders add a cushion — called a spread — to protect themselves. This is why your mortgage rate is always 1% to 3% above the bond yield or BoC rate.
They factor in things like:
– Their cost of borrowing
– Risk of borrower default
– Operational margins
So even if base rates drop, lenders may not pass on the full savings immediately.

How Your Profile Affects Your Mortgage Rate

Let’s be real: not everyone gets the best rate advertised online.
Your credit score, income stability, debt load, and even the property type and location all impact what rate a lender will offer you.

Can You Predict Mortgage Rate Movements?

Not exactly. Even economists get it wrong.
But you can track:
– Bond yields (for fixed rates)
– Bank of Canada rate decisions (for variable rates)
– Inflation forecasts and economic data
It’s less about guessing the exact rate, and more about understanding trends and timing your decisions smartly.

How to Protect Yourself from Rate Fluctuations

Here’s how you can shield yourself in a volatile rate environment:
– Lock in your rate with a mortgage pre-approval (many lenders offer 90 to 120-day holds)
– Understand the trade-off between fixed and variable — don’t just chase the lowest initial rate
– Work with a mortgage broker who can explain options and shop across lenders
-Avoid delaying decisions if you’re shopping in a rising rate environment

Final Thoughts: Stay Prepared, Not Panicked

Mortgage rates will always rise and fall — they’re tied to a mix of global economics, inflation, and lender behaviour.
What matters more is understanding how these changes affect you. Know what drives the ups and downs, stay on top of your lender’s rate updates, and use tools like pre-approvals or rate locks when you can.
Remember, it’s not about predicting the future — it’s about being prepared for it.
“If you’re curious how mortgage rates translate into real borrower risk, you’ll want to understand the concept of a trigger rate and what to do when you hit it in Canada.”
Why Are Mortgage Rates Changing in Canada?
Ever wondered why mortgage rates go up or down? Get a simple explanation of the key factors driving mortgage rates in Canada in 2025 and what it means for your finances. 📉 Learn What Affects Mortgage Rates in Canada