With high average home prices across Canada, most buyers need a mortgage to cover the cost. The mortgage interest rate you get greatly impacts your total cost and long-term savings. Even a small 0.5% difference could mean thousands in extra interest over the life of your mortgage.
While some factors are beyond your control, knowing the factors affecting mortgage rates in Canada can help you make intelligent choices and maximize your savings. By understanding what shapes mortgage pricing, you can make informed decisions and get competitive rates on one of the biggest purchases of your life.
What Affects Mortgage Rates in Canada?
Mortgage rates respond primarily to the overall supply and demand dynamics for loans and debt financing in the broader financial marketplace. The economic conditions below drive this supply-demand balance and the 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, lenders can access capital more cheaply when the BoC lowers rates to stimulate the economy during weak economic growth. As rates decline, variable-rate mortgages become more affordable for consumers.
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, bond yields is 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 with 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 with more attractive returns 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 look 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, reduce 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 cannot control lenders’ strategies to price mortgages and attract business.
- Posted rates are essentially baseline rates lenders advertise. Based on individual factors, discounted rates are then offered below the posted rates.
- 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 offer further discounts.
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.
Mortgage Loan Features
Beyond macroeconomic factors, the specific structural features of your mortgage can also impact the rate. Educated borrowers can make informed choices regarding their mortgage to help secure reduced pricing.
- Type of Mortgage rate: Fixed rates are initially higher than variable rates (about 1%) but offer stability. Adjustable-rate mortgages blend fixed and variable portions to balance rates and consistency.
- Mortgage Term: Terms of 1 – 3 years allow lenders to reprice the mortgage more frequently at current market rates, but offer attractive introductory discounted rates. Terms of 4 – 10 years provide more payment stability and rate certainty but average higher rates over time.
- Prepayment Flexibility: 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 allow prepaying any amount at any time, but correspondingly have higher interest rates.
- Loan Amount: Lenders will charge moderately higher interest rates for larger mortgage loan amounts, which inherently carry more overall risk and liability for the bank.
- Size of Down payment: Larger down payments of 20% or more substantially reduce the lender’s risk, enabling the most competitive rate offers. Smaller down payments of only 5-10% are certainly options.
- Insured mortgages: Insured mortgages enable lenders to offer reduced rates even with small down payments because the mortgage insurer covers default risks.
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.
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: GDS and TDS. Many lenders require TDS to be below 40% and GDS between 30% and 35%.
Meeting or exceeding lender thresholds results in improved rate offers, while missing benchmarks or excessive ratios can increase rates due to higher perceived risk.
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.
By maximizing your credit score and overall financial profile, you gain leverage in mortgage negotiations to qualify for the most competitive discounted rates available.
How do Mortgage Rates 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.
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.
FAQs about Factors Affecting Mortgage Rates in Canada
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.
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 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.
The Bottom Line
The factors affecting mortgage rates in Canada are many and complex. But knowledge is power, and 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.
