Understanding Mortgage Rates

Mortgage rates feel like they come from nowhere, but they are set by two different mechanisms — one for fixed, one for variable — and understanding which drives your rate tells you a lot about what to expect.

Fixed rates follow the bond market

Fixed mortgage rates track Government of Canada bond yields, particularly the 5-year bond. Lenders fund fixed mortgages by borrowing at bond-market rates, then add a spread to cover costs, risk, and profit — typically 1.5% to 2% over the bond yield.

Bond yields move on inflation data, economic growth, and expectations of what the Bank of Canada will do next. So fixed rates can rise or fall weeks before the Bank of Canada actually changes anything — the market prices in the expectation.

Variable rates follow the Bank of Canada

Variable rates are set as prime rate minus a discount. Prime moves in lockstep with the Bank of Canada's overnight policy rate, which is reset on eight scheduled dates a year. When the Bank cuts, your variable rate drops within days; when it hikes, it rises.

The discount off prime is locked for your term. So "prime minus 0.90%" stays prime minus 0.90% for five years — only the prime part moves.

What drives your personal rate

Two borrowers on the same day get different rates. The factors:

• Insured vs. uninsured. Insured mortgages (under 20% down, or "insurable" low-ratio files) carry lower rates because the lender's risk is covered. A 20%-down borrower can pay more than a 10%-down borrower.
• Loan-to-value. Uninsured pricing tiers get better as your equity share rises.
• Property type and use. Rentals, rural properties, and unusual builds price higher.
• Credit score. Below the high-600s, expect a rate adjustment or a narrower set of lenders.
• Amortization. A 30-year amortization often carries a small premium over 25.
• The lender and the channel. Monolines, credit unions, and banks price differently, and broker channels often beat branch rates.

How to secure a better one

• Get a pre-approval to lock a rate for 90–120 days while you shop — you keep it if rates rise.
• Shop through one broker rather than applying to many lenders, so your credit is only pulled once.
• Consider a shorter term. Two- and three-year fixed rates are sometimes lower than five-year, and they limit how long you are committed.
• Ask what the rate buys. A headline rate with a harsh penalty structure or no prepayment privileges is often a worse deal than a slightly higher rate with flexibility.

The rate on the billboard is a starting point. What you actually get depends on your file — and getting the file in front of the right lender is where a broker earns their keep.