How Are Mortgage Rates Determined in Canada?
Mortgage rates in Canada are influenced by the Bank of Canada (BoC) policy rate, bond yield movements, lender funding costs, and borrower-specific risk factors. The BoC policy rate is the benchmark that banks, lenders, and other financial institutions use to set interest rates for loans, mortgages, and all other lending products. A benchmark is the reference interest rate that sets the level of other interest rates.
Understanding the factors that determine interest rates will help you more effectively compare scenarios and rates offered to you. Whether you’re a first-time homebuyer or renewing or refinancing your mortgage, any change in interest rates can significantly affect the amount you pay toward interest-carrying costs on your mortgage.
Key Takeaways
- Variable mortgage rates are influenced by the Bank of Canada policy rate through lenders’ prime rates.
- Fixed mortgage rates are largely influenced by Government of Canada bond yields and their corresponding maturities.
- Personal factors such as credit score, down payment, loan-to-value (LTV) ratio, and property type impact the final mortgage rate offered.
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How Are Mortgage Rates Determined?
Mortgage rates are determined by either the Bank of Canada’s (BoC) policy rate or Government of Canada bond yields, as well as lender funding costs and risk premiums. Borrower-specific qualification factors will also influence the interest rate you receive, including your credit score, loan-to-value (LTV) ratio, down payment, and more.
How Often Do Mortgage Rates Change?
Variable mortgage rates follow changes in lender prime rates. Lenders adjust their prime rate in line with the Bank of Canada’s policy rate, which can change up to 8 times per year. However, the BoC retains the flexibility to act outside scheduled announcement dates if financial stability or inflation risks require immediate intervention. This means the policy rate could be adjusted at any time during periods of significant financial stress, severe market disruption, or an economic crisis.
Fixed mortgage rates can change at any time since Government of Canada bond yields move every trading day. Bond yields respond immediately to new information, including inflation reports, employment data, GDP releases, global economic developments, and shifts in investor sentiment. However, lenders don’t always adjust fixed mortgage rates with every small daily movement. Minor fluctuations may be absorbed within a lender’s existing pricing spread. When bond yields move over several days or by an amount that materially affects funding costs, lenders typically update their fixed mortgage rates to reflect these changes.
The Bank of Canada Policy Rate and Variable Mortgages
The Bank of Canada sets the target for the overnight rate, often referred to as the policy rate. This benchmark rate influences the cost at which major financial institutions lend money to each other overnight. When the Bank raises or lowers the policy rate, lenders adjust their prime rate accordingly.
The prime rate is the benchmark used to price variable lending products. When the Bank of Canada announces a change to the policy rate, new and existing variable mortgages tied to the prime rate are directly affected, adjusting to reflect the new rate often within a day.
Most Canadian lenders set their prime rate approximately 2.20% above the policy rate, though this spread can vary slightly by financial institution. For example, if the policy rate is 4.50%, a lender’s prime rate will likely be 6.70%. Variable mortgages are then priced at a discount or a premium to the prime rate. When lenders advertise variable mortgage rates, they do not list them as a standalone percentage. Instead, they show the rate as a discount or premium relative to prime. It typically appears as:
Prime – 0.80%
Prime + 0.30%
The size of the discount or premium is determined by a combination of borrower risk, mortgage structure, and lender competition at the time of approval. Lenders assess factors such as credit score, income stability, debt service ratios, loan-to-value (LTV) ratio, amortization, property type, and whether the mortgage is insured, insurable or uninsured.
Government of Canada Bond Yields and Fixed Mortgages
Fixed mortgage rates are heavily influenced by Government of Canada bond yields, particularly the yield that matches the mortgage term. For example, a 5-year fixed mortgage rate will closely track the 5-year Government of Canada bond yield. Bond yields move daily based on:
• Inflation expectations
• Economic growth data
• Global market and geopolitical conditions
• Anticipated Bank of Canada policy rate changes
• Investor demand for government debt
When bond yields rise, fixed mortgage rates typically rise. When yields fall, fixed rates usually decline. Lenders then add a spread above bond yields to account for:
• Funding costs
• Credit risk
• Liquidity risk
• Regulatory capital requirements
• Operating expenses
• Profit margin
Historically, fixed mortgage rates have been priced 1% to 2% above bond yields, but that spread can widen or narrow depending on market stress and competition.
Why Lenders Don’t Simply Match the Policy Rate or Bond Yield
Mortgage lending carries risk. Lenders set their rates and must account for borrower default risk, economic volatility, capital reserve requirements mandated by the Office of the Superintendent of Financial Institutions (OFSI), mortgage default insurance costs for high-ratio loans, and funding through deposits, securitization, or wholesale markets. As a result, mortgage rates always include risk premiums above the policy rate or bond yield. This need for lenders to earn a return on their investment is why mortgage rates can vary by lender and do not exactly match the policy rate or bond yields.
Borrower-Specific Factors That Influence Your Mortgage Rate
Beyond market forces, borrower-specific factors also determine the final rate you are offered. Two borrowers applying for the same mortgage amount on the same day at the same lender can receive very different interest rates. This difference factors in individual risks into the rate you are offered. These individual risks include:
• Credit score and repayment history
• Income stability and employment type
• Gross debt service (GDS) and total debt service (TDS) ratios
• Loan-to-value (LTV) ratio and down payment size
• Mortgage type (insured, insurable, uninsured)
• Property type and occupancy (owner-occupied vs rental)
• Amortization
• Mortgage term
Insured and insurable mortgages, where default risk is covered by CMHC, Sagen, or Canada Guaranty, often receive slightly lower interest rates because the lender’s risk is reduced as the federal government backs borrower default. Uninsured mortgages or refinances may receive slightly higher interest rates, with amortizations longer than 30 years requiring subprime lending to qualify through a B or alternative lender.
What Determines Mortgage Qualification Rates?
The Office of the Superintendent of Financial Institutions (OSFI) sets mortgage stress test rates to assess whether you can continue to make mortgage payments if borrowers are faced with financial challenges. The stress test rule sets a minimum qualifying rate (MQR) of 5.25% (the “floor,”), or your contract rate plus 2% (the “buffer”), whichever is higher.
The 5.25% floor is the benchmark rate used to account for borrower risk from economic fluctuations. This rate is set based on OSFI’s analysis of the financial vulnerabilities of borrowers and federally regulated financial institutions that could lead to mortgage defaults or threaten the financial system.
The buffer set by OSFI at +2% of your contract rate provides a margin of safety to assess whether borrowers can withstand changes in their financial circumstances, such as rising mortgage rates or changes in income.
For example:
If your contract rate is 4.80%, you must qualify at 6.80%.
If your contract rate is 3.00%, you must qualify at 5.25%.
This minimum qualifying rate (MQR) rule applies to new mortgages and refinances with federally regulated lenders. The stress test protects both borrowers and the financial system from sudden payment shocks if rates rise.
Frequently Asked Questions (FAQ) About Canadian Mortgage Pricing
How are mortgage rates determined in Canada?
Mortgage rates are influenced by the Bank of Canada’s policy rate for variable mortgages and the Government of Canada bond yield of the corresponding maturity for fixed mortgages. Lenders then add a spread to cover risk, funding costs, regulatory requirements, and their profit. Borrower-specific factors also affect the final rate offered.
Who sets mortgage rates in Canada?
Lenders set their mortgage rates by using bond yields or the prime rate as benchmarks and apply internal pricing models based on funding costs and borrower risk.
Can mortgage rates change without a Bank of Canada announcement?
Mortgage rates can change without a Bank of Canada announcement. Fixed rates can change at any time when bond movements are sustained or significant. Variable and adjustable mortgage discounts can also change at any time if lenders adjust their pricing strategy due to funding costs, competitive pressures, or risk appetite. The Bank of Canada can also make unscheduled changes to the policy rate in special circumstances, such as during periods of financial stress or economic crisis.
Final Thoughts
Monetary policy, bond market movements, lender funding costs, and borrower risk shape mortgage rates in Canada. The Bank of Canada sets the direction for variable mortgages through the policy rate, but it does not directly set fixed mortgage rates. Fixed rates respond to the direction of Government of Canada bond yields, which can move daily based on inflation data, economic growth, and global market conditions.
Variable and adjustable mortgages, on the other hand, move when the Bank adjusts the policy rate or, in rare cases, when it makes an unscheduled decision during periods of economic stress. Even when the policy rate remains unchanged, lenders can still adjust their discounts or premiums for rates on new mortgages.
Rates may move, markets may shift, but your unique mortgage strategy matters more. Speak with nesto’s mortgage experts to design a plan that protects your budget today and positions you for tomorrow.
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and the quality of their advice. nesto aims to transform the mortgage industry by providing honest advice and competitive rates through a 100% digital, transparent, and seamless process.
nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.
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