New Purchase Mortgage

Factors affecting Mortgage Rates in Canada

Understanding factors affecting mortgage rates, how interest rates impact mortgage costs, strategies to get the lowest competitive rate, and more.

Taking out a mortgage is one of the most significant financial commitments when buying a home in Canada. With average home prices over $800,000 in Toronto and Vancouver, most buyers need a mortgage to cover the cost. The morgate interest rate you get greatly impacts your total cost and long-term savings.

The mortgage rate is the percentage rate the lender charges for borrowing the money to purchase the home. This rate determines how much interest you will need to pay on top of the borrowed principal amount. Even a small 0.5% difference could mean tens of thousands in extra interest over the life of your mortgage.

While there are some factors that you cannot control, knowing factors affecting mortgage rates in Canada can help you make intelligent choices and maximize savings.

In this comprehensive guide, we will cover:

–       Factors affecting your mortgage rates
–       How interest rates impact mortgage costs
–       Strategies to get the lowest competitive rate

By understanding what shapes mortgage pricing, you can make informed decisions and get competitive rates on one of the biggest purchases of your life. Let’s dive in!

Factors affecting Mortgage Rates in Canada

Factors affecting Mortgage Rates in Canada
Factors affecting Mortgage Rates in Canada

Factors that borrowers cannot control

On a macro level, mortgage rates respond primarily to the overall supply and demand dynamics for loans and debt financing in the broader financial marketplace.

When demand is robust relative to supply, rates tend to rise as lenders can charge more in interest on their capital. Conversely, when the supply of financing outpaces demand, rates fall as lenders compete for business.

Several economic conditions below drive this supply-demand balance and associated mortgage rates in Canada.

Bank of Canada Policy Rate

The Bank of Canada (BoC) sets a target overnight interest rate that forms the underlying basis for variable-rate mortgages in the country.

  • When the BoC raises its policy rate to rein in inflation, lenders’ costs of funding mortgages increase. This directly causes the variable rates charged to consumers to rise in tandem.
  • Conversely, when the BoC lowers rates to stimulate the economy during periods of weak economic growth, lenders can access capital more cheaply. This results in variable-rate mortgages becoming more affordable for consumers as rates decline.

The BoC adjusts its influential policy rate eight times yearly at scheduled dates. Changes also indirectly impact fixed mortgage rates over the longer term.

Government Bond Yields

In addition to the BoC’s policy rate, yields on Government of Canada bonds represent a major driver of pricing for fixed-rate mortgages.

  • As bond yields increase based on economic outlooks and inflation expectations, lenders will raise fixed mortgage rates accordingly to maintain profit margins. The yields on 5-year government bonds directly affect 5-year fixed mortgage rates.
  • When bond yields decline due to weaker growth and inflation forecasts, lenders reduce pricing for fixed mortgages in correlation to the decreased yields.

Global Financial Markets

Thanks to the interconnectedness of worldwide finance, interest rate fluctuations in major foreign economies can influence mortgage pricing in Canada.

  • If concerns over recession drive down yields for US Treasuries or UK Gilts, Canadian lenders often feel pressure to reduce domestic fixed mortgage rates even if local economic conditions remain strong.
  • Alternatively, rising yields globally can lead to higher rates in Canada as lenders adjust to attract investors who now have more attractive returns available in international bond markets.
  • No economy exists in complete isolation anymore – global market forces directly impact the Canadian mortgage landscape.

Economic Growth Projections

Forecasts for Canadian economic growth and associated inflation also contribute to setting rate expectations among lenders.

  • When the economy is expanding robustly, demand for mortgages tends to increase as more individuals and families looking to purchase homes before rates potentially rise further. This increased competition for loans means lenders will raise rates.
  • Conversely, predictions of weaker economic activity, such as recessions, lead to reduced demand. This allows lenders to cut rates to stimulate borrowing and lending.
  • The overall outlook for GDP and income growth has an evident influence on mortgage rate trends.

Lender Practices and Market Competition

Borrowers have no control over the strategies lenders use to price mortgages and attract business.

  • Posted rates are essentially baseline rates lenders advertise. Discounted rates are then offered below posted rates based on individual factors.
  • Mortgage rates can vary regionally based on local competition, housing costs and other factors unique to different markets.
  • The extent to which lenders are willing to negotiate rates is also out of borrowers’ hands. Some lenders are very rigid, while others can be persuaded to discount further.

In summary, broader economic conditions dictate the baseline pricing environment for mortgages in Canada. Borrowers have little direct control over market forces, but understanding what drives rate movements helps set realistic expectations.

Factors that borrowers can control

Beyond macroeconomic factors, the specific structural features of your mortgage can also impact the rate lenders will offer you. Educated borrowers can make informed choices regarding their mortgage to help secure reduced pricing.

Mortgage Loan Features

Mortgage Rate

Fixed rates are higher than variable rates (about 1%) initially but offer stability. Adjustable rate mortgages blend fixed and variable portions to balance rates and consistency.


Amortization Period

Amortization period, which is the length of time set by your mortgage contract to ultimately pay off the loan also affects pricing.

  • Shorter terms: Terms of 1 – 3 years allow lenders to reprice the mortgage more frequently at current market rates but offer attractive introductory discounted rates.
  • Longer terms: Terms of 4 – 10 years provide more excellent payment stability and rate certainty for an extended period but average higher rates over time.
Prepayment Flexibility

The degree of prepayment flexibility in your mortgage terms is another critical decision impacting interest rates.

  • Closed mortgages: Restrict or limit your ability to pay off your mortgage early, but in return, feature lower interest rates over the loan term.
  • Open mortgages: Permit prepaying any amount at any time but correspondingly have higher interest rates to compensate lenders for reduced income.
Loan Amount

The total amount you seek to borrow for your home purchase also influences mortgage pricing.

  • As a general rule, lenders will charge moderately higher interest rates for larger mortgage loan amounts, which inherently carry more overall risk and liability for the bank.
  • On the borrower side, keeping your required loan amount as low as possible through a sizeable down payment gives you leverage to negotiate better rates. Overtaking on debt drives rates upward.

By thoroughly researching the options and tradeoffs associated with key structural mortgage features under their control, informed borrowers can tailor terms to their advantage and potentially secure reduced pricing.

Borrower Profile and Risk Assessment

A major factor in the specific rates offered to borrowers is the lender’s careful assessment of your creditworthiness based on your financial profile and overall risk factors.

By maintaining a healthy financial standing, you gain increased negotiating leverage to qualify for discounted pricing unavailable to higher-risk applicants.

Credit Score

Your credit score is one of the foremost criteria lenders evaluate and serves as a critical input into mortgage rates offered. The higher your score, the better the rate.

  • Scores above 760 reflect minimal perceived credit risk in the eyes of lenders, qualifying borrowers for the lowest rates.
  • Scores from 680 to 759 still enable reasonable rates from most mainstream lenders.
  • Scores below 680 can lead to rejection by many lenders or much higher rates due to elevated risk concerns.

Responsible credit management demonstrated through a strong history of on-time payments, low credit utilization, and limited new credit inquiries, helps build your score and maximize mortgage leverage.

Income and Existing Debt Obligations

Lenders also carefully assess your gross monthly income relative to current debts using two key ratios:

  • Total debt service (TDS) ratio – Total monthly debt payments divided by gross monthly income before taxes. Many lenders require this to be below 40%.
  • Gross debt service (GDS) ratio – Total monthly housing costs (mortgage, insurance, property tax) divided by income. This is typically between 30-35%.

Meeting or exceeding lender thresholds for TDS and GDS results in improved rate offers, while missing benchmarks or excessive ratios can increase rates due to higher perceived risk.

Size of Down Payment

Your down payment amount as a percentage of the home’s purchase price also heavily influences mortgage rates offered.

  • Larger down payments of 20% or more of the value substantially reduce the lender’s risk, enabling the most competitive rate offers.
  • Smaller down payments of only 5-10% are certainly options, but they increase the lender’s risk since they are financing a larger share of the property value, resulting in higher interest rates.

While first-time homebuyers with minimal savings should not be discouraged, realize that a smaller down payment will often result in higher interest costs. Methodically building a down payment over time can position you for better rate offers.

Property Type

Mortgages for investment properties that will be rented out or vacation homes involve an inherently higher risk of payment default from tenants or intermittent occupancy. As such, lenders tend to price these mortgages at higher interest rates than those for owner-occupied primary residences.

Property Location

The specific real estate market conditions in the geographic area or neighbourhood where you purchase the property can influence the mortgage rate offered. Many lenders view loans for properties in hot markets like downtown Toronto or Vancouver as riskier than other regions due to bidding wars, high valuations, and overexposure.

Mortgage Default Insurance

Insured mortgages enable lenders to offer reduced rates even with small down payments because the mortgage insurer covers the risks of default. High-ratio mortgages with loan-to-value ratios over 80% require this insurance.

By maximizing your credit score and overall financial profile, you gain leverage in mortgage negotiations to qualify for the most competitive discounted rates available.

Interest Rates Substantially Impact Mortgage Costs

While securing the lowest possible rate is always financially wise, it is also essential to fully grasp how the interest rate affects overall mortgage expenses over time. The higher the rate, the greater the portion of your payment toward interest charges rather than repaying the principal or amount borrowed.

Over the typical lifespan of a 25-year mortgage, a seemingly small difference of just 1% in interest rate can equate to tens of thousands of dollars in extra interest paid over the full term.

Consider this example:

Mortgage Amount: $450,000
Amortization: 25 years

Interest RateMonthly PaymentTotal Interest Paid
The diiferences in total payment with 1% increase in mortgage rate

This demonstrates why securing the most competitive interest rate based on your unique financial situation and credit profile is critical to maximizing lifetime savings and minimizing unnecessary interest costs.

Key takeaways: Strategies to Get the Best Mortgage Rate

Get the Best Mortgage Rate
Get the Best Mortgage Rate

Now that we have covered the key factors determining your mortgage rates, here are insider strategies leveraged by expert mortgage brokers to lock in reduced competitive pricing for clients

  1. Build and Protect Your Credit Score: Through responsible financial management, build and maintain your credit score over 760. This will give you access to the top rate tiers and demonstrate lower risk.
  2. Optimize Debt and Income Ratios: Lower your TDS and GDS ratios through focused debt reduction and constraint on taking on excessive new loan obligations. This shows lenders you can manage mortgage payments.
  3. Make a Sizable Down Payment: Save up and make down payments of 20% or more whenever feasible to substantially reduce the lender’s risk and qualify for preferred pricing.
  4. Compare Discounted Rates Widely: Do not simply compare posted rates. Vet discounted rates thoroughly across lenders, including big banks, credit unions, trust companies, and mortgage finance companies.
  5. Consider Shorter Terms Initially: Weigh shorter 1-3 year mortgage terms to capitalize on temporary discounts, then renew at prevailing market rates without a long-term lock-in.
  6. Evaluate Hybrid Mortgages: Assess hybrid mortgages that strategically blend fixed and variable rate portions to balance interest rate fluctuations with consistent payments.
  7. Time Your Application Strategically: Monitor economic outlooks, policy changes, and forecasted rate movements, applying when conditions align favorably for pricing.
  8. Leverage Mortgage Professional Expertise: Work with an experienced broker or mortgage agent who can provide guidance and advocate on your behalf to negotiate lender discounts.


The factors affecting mortgage rates in Canada are many and complex. But knowledge is power, and knowledge is the key to securing competitive financing.
Though broader forces are beyond your control, prudent decisions and wise choices can help you get the best rate for your needs.
By understanding what impacts pricing, borrowing strategically, and using all tactics, you can maximize savings on this significant transaction.


How does my credit score impact the mortgage rate I can qualify for

The higher your credit score, the lower risk you are deemed by lenders, and the better mortgage rate you can typically qualify for. Scores above 760 get preferred pricing.

How does my down payment amount affect mortgage rates?

The larger your down payment, the less risk for the lender, enabling them to offer better rates. Ideal down payments are 20% or more of the home's value.

Should I choose a fixed or variable rate mortgage?

Fixed rate mortgages have higher rates but offer stability. Variable rate mortgages fluctuate but start lower. It depends on your risk tolerance and outlook for rates.

How do shorter mortgage terms impact my interest rate?

Short 1-3 year terms often have lower promotional rates but require renewing more frequently. Longer terms have higher average rates but more stability.

Can mortgage brokers get better rates than the bank posted rates?

Yes, brokers have access to unpublished discounted rates from lenders and can negotiate on your behalf. Posted rates are essentially "sticker prices".

How can I get the best possible mortgage rate?

Have good credit, manage debts, make large down payments, compare options widely, consider shorter terms, and work with an experienced broker.

How do government bond yields influence mortgage rates?

Yields on 5-year and 10-year government bonds heavily influence the pricing of fixed rate mortgages with similar terms. When bond yields rise or fall, fixed mortgage rates tend to follow.

Article Sources
  1. What impacts mortgage rates in Canada? –
  2. How Are Mortgage Rates Determined in Canada? –
  3. Understanding Mortgage Rate Factors in Canada –
  4. Interest on mortgages –

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