If you’ve spent any time shopping for a mortgage in Canada, you’ve probably noticed something a little strange: mortgage rates feel like they’re always shifting. One day your broker mentions a great rate, and by the time you’re ready to move forward, that number suddenly looks a little… different. Sometimes a little higher, sometimes a little lower, but rarely the same for long.
It begs the big question: how are mortgage rates actually determined?
The truth is, a lot more goes on behind the scenes than most borrowers realize. Your mortgage rate isn’t just pulled out of thin air. It’s shaped by economic forces, financial markets, decisions from the Bank of Canada, lender risk appetite, and — yes — personal factors unique to you.
So let’s break all of this down in a way that feels human, relatable, and refreshingly clear. By the end of this article, you’ll understand what really moves mortgage rates, why they vary so much, and how to put yourself in the best possible position to qualify for a good one.
Key Points:
- Mortgage rates in Canada are driven by big economic forces, mainly the Bank of Canada’s overnight rate (for variable mortgages) and Government of Canada bond yields (for fixed mortgages).
- Inflation and economic conditions heavily influence rates, as the Bank of Canada raises or lowers rates to control inflation and stabilize the economy.
- Mortgage rates can change frequently, with fixed rates able to move daily based on bond markets, while variable rates move when the Bank of Canada adjusts its policy rate.
- Your personal profile matters, including credit score, debt levels, down payment size, and mortgage type, — all of which can affect the rate you’re offered.
What Actually Determines Mortgage Rates in Canada?
There’s no single puppet master controlling mortgage rates. Instead, it’s a combination of interconnected influences. Think of it like a recipe: each ingredient matters, and the final rate you’re offered depends on how those ingredients mix together.
Let’s go through the biggest ones.
1. The Bank of Canada’s Overnight Rate (The Big One)
The Bank of Canada (BoC) sets something called the overnight lending rate — essentially the rate at which major financial institutions borrow from each other. When the overnight rate goes up, banks’ borrowing costs increase. When the overnight rate drops, their borrowing gets cheaper.
This directly impacts variable mortgage rates.
Why? Because lenders typically price variable mortgages using the Bank of Canada’s overnight rate as a baseline. You’ll hear terms like “prime minus 0.5%,” or “prime plus 0.75%.” The Prime rate itself is influenced by the BoC. So when the BoC adjusts its rate, variable mortgage rates almost always move in sync.
Fixed mortgage rates, however, are influenced differently.
2. Bond Yields (The Secret Driver Of Fixed Mortgage Rates)
Most Canadians don’t follow bond markets, but bonds quietly dictate a big part of the mortgage world.
Fixed mortgage rates — especially 5-year fixed — are heavily tied to the 5-year Government of Canada bond yield. When bond yields rise, fixed mortgage rates tend to follow. When yields fall, fixed rates usually decline as well.
| Why do lenders care about bonds? Because fixed-rate mortgages are basically long-term lending products. Lenders want to match their risk and expected return to something stable — and government bonds are as stable as it gets. This is why you’ll often hear mortgage professionals say, “fixed rates could drop soon — bond yields are falling.” |
3. Inflation — The Root of Almost Everything
Inflation plays a massive role in mortgage rate decisions.
When inflation runs hot, the Bank of Canada typically raises its overnight rate to cool spending. Higher borrowing costs slow down consumer activity, which helps bring inflation back to target.
When inflation eases, rates can eventually come down again.
Even bond markets react to inflation data. If inflation reports look promising, bond yields often drop — leading to potential drops in fixed mortgage rates.
| Note: If there’s one economic number to watch to understand mortgage rate trends, it’s inflation. |
Learn more: How Inflation Affects Your Mortgage
4. The State Of The Canadian Economy
Mortgage rates aren’t set in isolation. If the Canadian economy is booming — low unemployment, strong consumer spending, rising GDP — rates often trend upward, because the Bank of Canada wants to maintain price stability.
If the economy weakens — job losses, reduced spending, slower growth — the Bank may cut rates to stimulate activity. Bond yields also tend to drop during weaker economic times, pulling fixed rates down with them.
5. Global Economic Conditions
Canada may be a powerhouse in many ways, but economically, we’re still tied to the global marketplace.
Events in the U.S., Europe, and Asia can influence our mortgage rates by moving:
- Global bond markets
- Investor sentiment
- Currency values
- Commodity prices
| For instance: If global investors rush to safe assets during times of uncertainty, they often buy government bonds. That drives bond yields down — and fixed mortgage rates may follow. |
How Often Do Mortgage Rates Change?
Here’s something that surprises a lot of people: mortgage rates can technically change every single day. Sometimes multiple times per day.
That’s because bond markets fluctuate minute by minute, and lenders adjust their fixed mortgage pricing in response. If yields jump, lenders may push out a rate update by lunchtime. If yields fall fast, rates may drop by the next morning.
Variable mortgage rates only move when the Bank of Canada changes its overnight rate — typically eight times a year, based on scheduled announcements. However, the discount lenders apply to their prime rate can change at any time.
In other words:
- Fixed Rates: Can change daily.
- Variable Rates: Move with the Bank of Canada.
- Prime Rate Discounts: Can change without notice.
If you’re home shopping, it’s smart to monitor rate trends — and even smarter to lock in a rate hold if you think rates might climb soon.
Learn more: Canadian Mortgage Rate History
Why Do Mortgage Rates Vary Between Banks and Across Provinces?
If you’ve ever compared mortgage rates across different websites, you’ve probably wondered why numbers rarely line up perfectly. The reason is simple: no two lenders are alike.
Here’s what influences rate differences.
1. Different Funding Costs
Banks get their money from consumers, investors, and wholesale funding markets. Credit unions rely more heavily on deposits. Monoline lenders (non-bank lenders who specialize in mortgages) rely on investors and mortgage-backed securities.
Because each institution has a different mix of funding sources, their costs vary — and so do their mortgage rates.
2. Different Risk Tolerance
Lenders evaluate risk differently. A national bank may prioritize stability and price more conservatively. A credit union may offer better rates to attract members. A monoline lender may take on slightly more risk to compete on price.
It all depends on what they’re trying to achieve.
3. Competition In Local Markets
This is where geography comes in.
A lender may choose to offer ultra-competitive rates in Ontario, where housing volume is high, but offer slightly higher rates in smaller provinces where the mortgage market is smaller.
Some lenders only operate in certain parts of Canada, so rates naturally differ regionally.
Learn more: Why Mortgage Rates Vary by Province, and How You Can Level the Playing Field
4. Individual Promotions and Specials
Lenders frequently run limited-time offers that temporarily lower certain mortgage rates. These can vary by:
- Province
- Mortgage type
- Down payment size
- Amortization period
These promotional rates create additional discrepancies.
How Interest Rates Affect Housing Affordability
This is the part that matters most to everyday Canadians. Rising or falling interest rates can dramatically shift what buyers can afford — even when home prices stay the same.
Let’s break it down.
1. Higher Rates = Higher Monthly Payments
Even a small rate increase can add hundreds of dollars to your monthly mortgage payment. That means buyers qualify for smaller mortgages, reducing purchasing power.
When rates go up:
- Affordability drops.
- Some buyers get priced out.
- Bidding wars cool.
- Home prices may soften (but not always).
This is exactly what Canada saw in 2022–2023 during the Bank of Canada’s aggressive rate hikes.
2. Lower Rates = More Buying Power
When rates drop, monthly payments shrink — meaning buyers can often qualify for larger mortgages. This typically increases demand, which can push prices up in competitive markets.
Lower rates are one reason Canada saw massive price growth from 2020–2021.
3. The Stress Test Adds an Extra Layer
Even if your lender offers you a rate of 4.99%, you still have to qualify at the stress test rate, which is the higher of:
- Your contract rate + 2%, or
- A minimum qualifying rate set federally (currently 5.25%)
Higher actual mortgage rates mean higher stress test levels — which shrink borrowing power even further.
How You Affect Your Mortgage Rate
A big part of your mortgage rate comes from the economy and the Bank of Canada, but there’s still a lot you can control. Lenders don’t offer everyone the same rate. Your financial profile matters, and improving it can genuinely save you thousands.
Here’s how you influence your own mortgage rate.
1. Your Credit Score
This is one of the biggest personal factors lenders look at.
A strong score (typically above 680–700) helps you qualify for the best rates. A lower score means you may still get approved — but at a higher cost, as the lender sees more risk.
Improving your credit score before applying is one of the smartest moves you can make.
Learn more: Minimum Credit Score Required For Mortgage Approval In Canada
2. Your Debt-to-Income Ratio (TDS & GDS)
Lenders calculate two key ratios:
- GDS (Gross Debt Service): Housing-related costs vs. your income.
- TDS (Total Debt Service): All debt obligations vs. your income.
Lower ratios mean you’re more likely to qualify for competitive rates. If your debt load is high, you may pay more — or struggle to qualify at all.
3. Employment Stability
Someone with consistent income and a long work history is seen as a safer borrower. Self-employed individuals or those with fluctuating income may be offered higher rates unless strong financial documentation is available.
4. Your Down Payment Size
Putting more money down reduces the lender’s risk and can lower your rate. Mortgages with less than 20% down are insured, which sometimes actually leads to lower rates because the insurer absorbs some of the lender’s risk.
This is why insured 5-year fixed rates are often among the lowest in the market.
Learn more: Your Guide To Mortgage Down Payments In Canada
5. The Type of Mortgage You Choose
Different products come with different pricing:
- Fixed vs. variable: Fixed often priced higher due to long-term risk.
- Open vs. closed: Open mortgages offer flexibility, so they cost more.
- Shorter vs. longer terms: Shorter terms often come with lower rates.
- Amortization length: Longer amortizations sometimes affect pricing.
Your choices influence your final rate — sometimes significantly.
6. Whether You Use a Mortgage Broker
Mortgage brokers don’t just help you apply. They work with multiple lenders and can often secure lower rates than posted bank rates.
Because brokers send lenders a high volume of business, lenders may offer them exclusive pricing the public can’t access directly.
Working with a broker can sometimes save you 0.10% to 0.40% off your rate — which adds up quickly over a 25-year term.
Final Thoughts
Mortgage rates in Canada are shaped by a blend of big-picture forces (like the Bank of Canada, inflation, and bond markets) and personal factors (like your credit, income, and mortgage product choice). They can change daily, vary widely between lenders, and have a direct impact on how much home you can afford.
While you can’t control the global economy, you can control your financial profile — and that’s often enough to secure a significantly better rate.
Whether you’re buying your first home, renewing your mortgage, or exploring refinancing options, understanding rate mechanics helps you make smarter, more confident decisions.
