The Bank of Canada does not set ordinary mortgage rates
The interest rate offered to a borrower is set by the mortgage lender.
The Bank of Canada influences the rate environment, particularly through its target for the overnight rate, but it does not dictate the rate on an individual mortgage. Its policy rate affects short-term market rates and commercial-bank prime rates, which are commonly used to price variable-rate mortgages. Longer-term expectations can also affect longer-term funding markets.
The lender’s cost of funds
A mortgage lender must obtain the money it advances from somewhere. Depending on the institution, funding may come from:
Deposits
Investors
Wholesale borrowing
Securitization
Covered bonds
Mortgage-backed funding
Private investor capital
The lender’s funding cost is a major component of the mortgage rate. The lender must also account for operating expenses, capital requirements, liquidity, expected losses and profit. The Bank of Canada identifies funding cost as the largest general component of mortgage pricing.
Variable mortgage rates
A variable mortgage is commonly quoted as:
Variable mortgage rate = Lender prime rate + or − Contractual adjustment
For example:
Mortgage rate = Prime − 0.60%
Variables
Lender prime rate: the reference rate set by that lender
Contractual adjustment: the fixed premium or discount stated in the mortgage contract
Mortgage rate: the resulting rate charged to the borrower
If the lender’s prime rate changes, the mortgage rate changes by the corresponding amount unless the contract provides otherwise.
The lender—not the Bank of Canada—sets its prime rate. Policy-rate changes commonly influence prime because the overnight rate affects short-term funding conditions, but lenders control their own timing and pricing.
A quotation of “prime minus 0.60%” does not preserve today’s absolute rate. It preserves the contractual discount from that lender’s prime rate.
Fixed mortgage rates
A fixed rate remains unchanged during the selected term.
Fixed-rate pricing is influenced more directly by the cost of obtaining funds for a similar period. Relevant market conditions can include:
Government bond yields
Deposit and wholesale funding rates
Investor demand
Expectations for inflation and future interest rates
Lender competition
Funding liquidity
This is why a five-year fixed mortgage rate can rise or fall without a Bank of Canada announcement. Bond and funding markets may adjust in anticipation of future policy, inflation or economic conditions.
The Bank of Canada has explained that mortgage funding comes from depositors and investors in Canada and abroad, and that changes in those market rates can affect Canadian fixed mortgage pricing.
Why borrowers receive different rates
| Pricing factor | Why it may matter |
|---|---|
| Mortgage term | The lender assumes interest-rate and funding risk for a different period |
| Fixed or variable structure | Each structure exposes the lender and borrower to different rate risks |
| Insured or uninsured status | Default insurance can reduce the lender’s credit-loss exposure |
| Owner-occupied or rental use | The risk, underwriting and product may differ |
| Loan-to-value | Equity affects expected loss if the mortgage defaults |
| Credit history | Stronger repayment history may reduce perceived credit risk |
| Income and documentation | Non-standard verification may require a different product |
| Property type and location | Marketability and valuation risk affect lender appetite |
| Open or closed mortgage | An open mortgage gives the borrower more repayment flexibility and creates greater prepayment risk for the lender |
| Prepayment and portability features | Flexibility can affect the economics of the mortgage |
| Lender and distribution channel | Funding model, operating costs and competitive strategy differ |
Insured mortgages can sometimes carry a lower interest rate than otherwise comparable uninsured loans because insurance reduces the lender’s default-loss exposure. The borrower must still consider the insurance premium and complete borrowing cost.
Posted, discounted and contract rates
Posted rate
A posted rate is a publicly advertised lender rate.
Discounted rate
A discounted rate is lower than the lender’s posted rate.
Contract rate
The contract rate is the rate legally agreed to in the mortgage.
The difference matters because a lender’s prepayment-penalty formula may refer to:
The contract rate
The original posted rate
The original discount
A current comparison rate
Two lenders offering the same contract rate may therefore produce very different break penalties.
FCAC distinguishes among prime, posted and discounted rates and advises borrowers to examine how the lender sets and applies each rate.
Rate holds
A rate hold generally protects an eligible borrower from a rate increase for a stated period while the application or purchase is completed.
The details are lender-specific:
Duration
Eligible transactions
Whether the rate can be reduced if market pricing falls
Documentation required
Property deadlines
Product-change rules
Whether a fully underwritten approval is required
A rate hold is not a promise that the mortgage itself will be approved. Borrower, property, insurer and documentation conditions still apply.
APR and total borrowing cost
The contract rate measures interest. The annual percentage rate, or APR, is intended to express borrowing cost on an annualized basis after applicable cost-of-borrowing items are considered.
For a mortgage with fees, the APR may be higher than the stated interest rate. Borrowers should compare:
Interest rate
Lender and brokerage fees
Default-insurance premium
Cashback repayment conditions
Prepayment penalty exposure
Legal and appraisal costs
Product restrictions
APR can improve comparison, but it cannot predict future variable-rate changes, renewal rates or a penalty caused by breaking the mortgage.
Why the lowest advertised rate may not be the best mortgage
A low-rate mortgage may include:
Limited prepayment rights
A restrictive penalty formula
A bona fide sales clause
Weak portability
No blend-and-extend option
A collateral charge
Limited access to additional borrowing
Strict renewal or transfer conditions
A borrower expecting to sell, refinance or move during the term may save more through flexibility than through a small rate discount.
Eligibility for a rate does not establish suitability of the product attached to it.