Like most homeowners, you’ll need a mortgage to buy your dream home. The interest rate offered by your lender will have a major impact on the total cost of your loan—and on your budget. Learn more about how to choose the option that best suits your goals and situation.
What is a mortgage rate?
A mortgage rate is the percentage of interest you’ll pay on your loan amount until the end of the term. This rate directly affects your monthly payments and the total cost of your mortgage. The mortgage rate is set when you take out your mortgage, whether through a bank, a credit union, or a mortgage broker. These lenders assess your financial profile to offer loan terms tailored to your situation. It’s important to compare different offers and get the best possible rate for your needs.
How are mortgage rates set?
Mortgage rates are determined based on economic factors such as inflation, monetary policy, and the bond market, as well as the specific criteria of each lending institution. While it’s difficult to predict your exact rate, understanding how the rates work is crucial because they will directly affect your monthly payment amount, loan term, interest charges, borrowing capacity, and the total cost of buying your home.
To get a quick estimate of your monthly payments under different scenarios, try using our mortgage payment calculator or our other mortgage tools.
The Bank of Canada’s key interest rate
The Bank of Canada’s key interest rate, adjusted eight times a year, directly influences variable mortgage rates. Financial institutions use this rate to set their prime rate, which in turn influences the terms for accessing mortgage credit. This rate can go up or down depending on the economic climate, which affects your overall budget.
Five-year bond rate
Fixed rates are set based on yields of bonds with similar terms. For example, the yields on five-year bonds determine the fixed rates for five-year mortgages.
How your borrower profile affects your mortgage rate
Your financial situation plays a major role in the mortgage rate a lender may offer you.
Your gross annual income and job stability give lenders an idea of how much you can realistically afford to borrow and repay.
Lenders will also take a close look at your credit report, as it reflects your spending habits and your ability to meet financial obligations.
The higher your down payment, the less you’ll need to borrow, which will reduce your overall debt load. If the lender sees you as a low-risk borrower, you may even qualify for a lower interest rate. By putting down 20% or more, you’ll avoid paying mortgage loan insurance (CMHC), which can save you a significant amount over time.
Factors that influence mortgage rate changes
Mortgage rates fluctuate based on several major economic factors. In Canada, the key interest rate set by the Bank of Canada directly affects both fixed and variable mortgage rates offered by your financial institution. Understanding these factors can help you choose the repayment option that best suits your needs and budget.
The Canadian economy and inflation
Inflation—driven by consumer spending, the housing market, employment, and immigration—is the most important factor the Bank of Canada considers when making decisions about interest rates.
The role of the central bank
The Bank of Canada’s primary role is to maintain economic stability across the country. To keep inflation in check, it regularly adjusts its key interest rate. When the economy is doing well, the Bank often raises the rate to prevent inflation from rising above target. When the economy slows down, it may lower the rate to stimulate growth.
The type of rate you choose: fixed or variable
A fixed rate stays the same for your whole mortgage term, so your payments stay stable and easy to plan for. A variable rate changes with the Bank of Canada’s key interest rate, which means your payments—or how much of them goes to interest—can go up or down.
The choice between a fixed or variable rate mostly depends on your financial goals, the economic outlook, and your personal situation. If you’re a first-time buyer or working with a tight budget—or if rates are expected to rise—a fixed rate is often the safer option. On the other hand, if you have short-term plans or multiple investments, a variable rate could be preferable, especially since it usually comes with more flexible repayment and cancellation terms.
It’s a good idea to meet with a mortgage broker before making your decision. A one-on-one consultation can help you understand the pros and cons of each option based on your specific situation.
Advantages and disadvantages of different rate types
| Rate Type | Advantages | Disavantages |
| Fixed rate | Stable and predictable payments | Lack of flexibility Limitations on prepayment Significant penalties |
| Variable rate | Potential savings More prepayment flexibility Lower penalty amounts | Unpredictable payments |
What are the risks to consider?
Before choosing between a fixed or variable rate, it’s important to understand the risks that come with each option. Misjudging these factors could lead to serious financial consequences. Here are the key risks to keep in mind.
The risk of rising interest rates
A fixed rate protects you from increases in the key interest rate. On the other hand, it doesn’t allow you to benefit from potential savings if market conditions improve.
Ability to handle higher monthly payments
A variable rate can increase financial uncertainty. If rates go up, your mortgage payments will rise.
Prepayment penalties
Variable-rate mortgages generally offer more flexible repayment terms than fixed-rate mortgages. Also, if you break your mortgage, the penalties are often lower.
Want to find the best mortgage rate? We’ll help make it happen.
As you’ve seen, mortgage rates fluctuate and are influenced by many factors—not just your personal profile.
Choosing between a fixed or variable rate depends largely on your financial situation, your risk tolerance, and your medium- or long-term goals.
Our mortgage brokers will help you assess your situation and compare options based on your goals, your risk tolerance, and current fixed and variable rates. Book an appointment and get the best possible rate for your mortgage!
Key takeaways
- Your mortgage rate affects your monthly payments and how much you can borrow.
- A fixed rate is a good option when rates are especially low or expected to rise.
- A variable rate can be a smart choice if your financial situation can handle potential payment increases.