Insights & advice
What impacts mortgage rates in Canada?
April 2022 – 15 min read
Overall mortgage rates are influenced by economic factors and the decisions of mortgage lenders and The Bank of Canada
Your individual mortgage rate can be influenced by your credit rating, the mortgage type and how often you renegotiate your mortgage rate
If you have a variable rate mortgage, your mortgage payments will stay the same, but less of the payment amount will go towards paying down the mortgage principal
What’s in this article?
- Business factors that affect mortgage rates
- Economic factors that influence mortgage rates
- How the Bank of Canada impacts mortgage rates
- What drives variable mortgage rates?
- What drives fixed mortgage rates?
- Risks that can impact your mortgage rate
- What happens to your mortgage payments when interest rates rise?
Business factors that affect mortgage rates
Mortgage providers, like all businesses, need to make a profit. They do so by charging borrowers a higher interest rate than they pay to borrow money from someone else. They also factor in their operating costs and something to cover the risk that some people may default on their mortgage.
Economic factors that influence mortgage rates
In addition to using customer deposits, mortgage providers borrow money from investors to lend as mortgages.
In a strong economy, there’s larger demand for those investors’ money, so lenders pay a higher interest rate to get that money. In a weak economy, there is lower demand, so they’ll pay a lower interest rate.
Sometimes those investors are in other countries, so the strength of their economies will also influence the interest rate.
How the Bank of Canada impacts mortgage rates
The Bank of Canada sets a target overnight lending rate (the rate banks charge each other to cover short-term daily transactions). This rate influences each mortgage provider’s prime rate (the rate they charge their most credit-worthy borrowers).
When the economy is growing, The Bank of Canada may raise their target rate to slow inflation. When the economy is weak, they may lower the rate to help stimulate economic growth.
The Bank of Canada sets their target rate eight times a year: in late January, early March, mid-April, late May, mid-July, early September, mid-October and early December. In extraordinary situations they may also adjust rates between these fixed dates.
What drives variable mortgage rates?
Variable mortgage rates are linked to the mortgage provider’s prime rate and will move up and down accordingly.
What drives fixed mortgage rates?
Fixed mortgage rates are primarily driven mostly by Canadian bond yields, which are influenced by economic factors like unemployment, exports and inflation.
Risks that can impact your mortgage rate
Credit risk – A good credit rating helps show the mortgage provider you’re good at repaying your debt and may earn you a lower interest rate.
Interest rate risk – The more often you renegotiate your mortgage, the higher the risk your interest rate will be different than before. If it’s important your mortgage rate stay the same for as long as possible, you’ll likely pay a higher interest rate for locking in your mortgage rate for longer.
Prepayment risk – If you repay your mortgage early, the mortgage provider won’t be able to profit as much as they thought they would. That’s why an open mortgage (which lets you pay back the entire mortgage at any time) usually has a higher interest rate than a closed mortgage (which limits when and how you can increase payments or pay back lump sums).
What happens to your mortgage payments when interest rates rise?
If you have a fixed rate mortgage, your payments will stay the same until your rate term expires.
If you have a variable rate mortgage, your mortgage payments will stay the same, but less of the payment amount will go towards paying down the mortgage principal.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.