The most affordable mortgages are those that come with the lowest interest rates. The lower the rate, the less money you’ll have to pay for the interest portion of your mortgage, making the overall home loan much more affordable in the long run. But what happens if the rate you were quoted at the beginning of the mortgage pre-approval process increases while you’re out there hunting for your dream home?
Key Points:
- Mortgage rates can change quickly while you’re shopping for a home.
- The rate you’re offered can directly affect your affordability.
- Economic factors, like inflation, bond yields, and Bank of Canada decisions, contribute to rate movements, though they don’t always change at the same time.
- You can protect yourself by using strategies like rate holds, pre-approval, and locking into fixed rates.
Why Mortgage Rates Can Change While You’re Buying
Mortgage rates can fluctuate while you’re in the process of buying a home because they are influenced by things like economic conditions, lender policies, and market demand. Factors such as inflation and Bank of Canada interest rate decisions can cause rates to rise or fall unexpectedly.
Even your personal financial profile, including your credit score and debt-to-income ratio, may affect the final rate you’re offered. Since rates are not locked until you secure a mortgage agreement, buyers may experience changes between pre-approval and closing. This is why it’s important to keep tabs on trends and consider rate-lock options.
| What Drives Interest Rate Movements? Interest rate movements are influenced by the following: – Bank of Canada Policy Rate: The central bank sets the overnight rate, which influences borrowing costs across the economy. – Inflation Trends: Inflation pressures often push rates higher, while stable inflation supports lower rates. – Economic Growth: Strong economic growth increases demand for credit, leading to higher rates. On the other hand, weak economic growth has the opposite effect. – Bond Market Yields: Government bond yields serve as benchmarks for long-term interest rates. – Investor Sentiment: Confidence or fear in financial markets can affect demand for safe assets. For example, COVID and the financial crisis of 2007 had significant impacts on investor confidence. |
What Are Today’s Mortgage Rates Like In Canada?
Canada’s major banks currently list 5‑year mortgage rates in the 4.5% range, as of October 2025. Although borrowing costs had been climbing steadily in recent years, they have begun to ease following the Bank of Canada’s decision to lower its overnight lending rate.
The Bank of Canada’s overnight rate was recently cut to 2.25%. That means borrowing costs for variable-rate mortgages are under more downward pressure. That said, fixed mortgage rates are also influenced by bond market yields, not just the Bank of Canada’s policy.
Currently, the prime rate in Canada is 4.45%.
What Have Mortgage Rates Done In The Past In Canada?
Mortgage rates have fluctuated greatly over the decade in Canada. Here’s a quick snapshot of Canada’s mortgage rate history from 1980 to 2025, in 5-year increments:
| Year | 5-Year Fixed Rate | Prime Rate |
| Current (as of October 2025) | 6.09% | 4.45% |
| 2020 | 5.19% | 3.95% |
| 2015 | 4.79% | 30.% |
| 2010 | 5.49% | 2.25% |
| 2005 | 6.05% | 4.25% |
| 2000 | 8.25% | 6.5% |
| 1995 | 10.5% | 8.0% |
| 1990 | 12.0% | 13.5% |
| 1985 | 12.5% | 11.25% |
| 1980 | 13.25% | 15.0% |
Learn more: Canadian Mortgage Rate History
What Do Higher Interest Rates Mean For Canadian Borrowers?
In a nutshell, when rates increase, borrowers will pay more for their mortgages. A higher rate means more interest paid on the loan overall. And with a higher mortgage rate comes a higher mortgage payment, all things considered equal. This may affect your budget when buying a home, which means you may need to spend less, since it no longer works with your budget.
That said, how rising rates affect borrowers and homeowners exactly depends on the type of mortgage they hold: variable or fixed.
Impact On Variable-Rate Mortgage Borrowers
Approximately one-third of Canadian homeowners have a variable-rate mortgage, which means the rate fluctuates up and down depending on the general interest rate level in the Canadian economy. If the Bank of Canada’s rate increases, the variable rate will increase, meaning mortgage payments will inevitably go up.
For homeowners who currently hold a variable-rate mortgage, the question to ask is whether or not to switch to a fixed-rate mortgage or continue to take advantage of the current low rates.
In Canada, there are two types of variable mortgages:
- Adjustable-Rate Mortgage (ARM): Mortgage payments change immediately with interest rate changes. This means higher monthly payments, reduced borrowing power, and slower equity growth.
- Variable-Rate Mortgage With Fixed Payments: Monthly payments stay the same, but more of the payment goes toward interest. When rates increase, your amortization period may extend, and you may hit the trigger rate, forcing your payments to rise or requiring a lump sum payment.
Impact On Fixed-Rate Mortgage Borrowers
Fixed-rate borrowers are protected from payment increases throughout the term. So, if rates increase, these borrowers will keep the same payment amount, same interest rate, and enjoy predictable budgeting.
However, higher rates can eventually impact fixed-rate borrowers at the time of renewal. If their mortgage term ends during a high-rate environment, the rate they’re offered may be much higher when they renew. This can cause their mortgage payments to be much higher and potentially out of their budget.
| Note: A 100% increase in rates, only leads to a 30% increase in the mortgage payment. Furthermore, you will have paid down your mortgage at renewal, which means your payment isn’t likely to go up as much, if at all. |
For illustration purposes, let’s use an example of how an increase in mortgage rates from 4% to 5% can impact your monthly mortgage payments and overall interest paid:
- Loan amount: $400,000
- Term: 5-year fixed
- Amortization period: 25 years
| 4% Interest Rate | 5% Interest Rate | |
| Monthly Payment | $2,104 | $2,337 |
| Interest Paid Over The Term | ~$81,000 | ~$102,180 |
Should You Consider a Fixed-Rate Over a Variable-Rate Mortgage?
Choosing between a fixed-rate and variable-rate mortgage depends on your risk tolerance, financial stability, and expectations for future interest rates.
| When To Choose A Fixed-Rate Mortgage | When To Choose A Variable-Rate Mortgage |
| You want your interest rate and monthly payments to remain the same for the entire term.You want stability and predictability, making budgeting easier.You want protection against rising interest rates | You’re comfortable with risk and are willing to ride out market fluctuations.You expect rates to fall in the near future.You plan to sell your home within a few years |
Learn more: Fixed-Rate vs. Variable-Rate Loans
What About The Mortgage Stress Test?
The mortgage stress test ensures that borrowers can handle higher mortgage payments if interest rates increase. It requires applicants to qualify at the greater of:
- The Bank of Canada’s qualifying rate (currently 5.25%), or
- Their lender’s offered rate plus 2%
it has the following effects on the stress test and borrowing power:
- Tougher Qualification: If a lender offers 6% on a mortgage, for example, the stress test requires borrowers to qualify at 8% (lender’s rate + 2%). This significantly reduces borrowing power.
- Reduced Affordability: Rising rates reduce the loan amount that buyers can qualify for.
- Renewals & Refinancing: Homeowners renewing or refinancing face tougher qualification requirements.
| In A Nutshell: Rising mortgage rates make Canada’s mortgage stress test harder to pass because borrowers must qualify at either the Bank of Canada’s benchmark rate or their lender’s rate plus 2%. This reduces the mortgage amount they can afford, or affects their ability to get approved at all. |
Learn more: The Canadian Mortgage Stress Test
What To Do To Protect Yourself Against Rising Rates When Shopping For A Home And Mortgage
Protecting yourself against rising rates means taking proactive steps, including the following:
- Lock In Your Rate: Many lenders allow you to “lock” your mortgage rate for a set period, usually between 30 and 120 days. This means that even if rates rise before your closing date, you’ll still pay the lower locked-in rate.
- Choose A Fixed-Rate Mortgage: With a fixed-rate mortgage, your interest rate and monthly payments remain constant for the entire term. This protects you from sudden increases in rates during the term and makes budgeting predictable. It’s especially useful in volatile markets where rate hikes are expected.
- Budget For Higher Payments: Even if you secure a lower rate now, it’s a good idea to plan for the possibility of higher payments in the future. Setting aside extra funds each month can help you handle increases without financial strain.
- Consider Shorter Terms: Shorter fixed terms may come with lower rates compared to longer terms. They also give you the flexibility to refinance sooner if rates decline.
- Shop Around For Lenders: Not all lenders offer the same rates or terms. Comparing multiple offers ensures you’re not overpaying. But choosing a mortgage isn’t just about the rate; it’s important to consider the terms and conditions as well (ie. prepayments, penalties, flexibility, etc). Use an online loan comparison platform like Loans Canada to comparison shop.
- Avoid Overborrowing: Taking out the maximum loan amount you qualify for can leave you vulnerable if rates rise. Borrowing less than your maximum approval amount gives you more breathing room if your payments increase.
- Use Prepayment Privileges: Many lenders allow you to make lump-sum payments or increase your monthly payments without being charged early prepayment penalties. Using these privileges can reduce your principal faster, which lowers the impact of future rate hikes.
Final Thoughts
Interest rates don’t stay the same forever. At some point, they’ll change and can go in either direction. Based on this fact, Canadian borrowers should take the opportunity to assess their mortgages and finances to make sure they’re equipped to handle slight increases in monthly payments over the long run as a result of inevitable interest rate fluctuations.
