Understanding Mortgage Rates in Canada: What You Need to Know
If you’re thinking about buying a home or renewing your mortgage, understanding how mortgage rates work super important. In Canada, there are two main types of mortgage rates: variable and fixed and each has its pros and cons, and knowing how they are set up is super important.
Variable Mortgage Rates
Variable-rate mortgages are tied to your lender’s prime rate, which is changed by the Bank of Canada’s key interest rate. So, when the Bank of Canada raises or lowers rates to manage inflation, your mortgage interest rate goes up or down as well.
This type of mortgage is a great fit for people who are comfortable with a bit of risk—because while the rate might go up, it also has the potential to drop, which could save you money.
There are two types of variable rates, variable or adjustable. Most people think of adjustable when they think of variable rates. With adjustable, your payments go up or down as the interest rate is increased or lowered. With a Variable rate however, your payment stays the same but more or less of your payment goes towards principle as the rates are going down and more towards interest if the rates go up. These types of variable rates can be a happy medium if you want the benefits of the variable rate but the stability of a consistent payment. The one watchout with this type of mortgage though is you can get to the point where your payment is no longer covering all of the interest so your mortgage balance will start going up as opposed to down.
Fixed Mortgage Rates
Fixed-rate mortgages offer stability as you will know what your payment throughout the term as it does not change. Banks determine how to set the rates based on the Canadian government bond yields, and what they were priced at when you got your mortgage. especially the five-year bond.
With a fixed rate, your payment amount doesn’t change over your term—even if the Bank of Canada changes their rates during your mortgage. That makes fixed-rate mortgages a solid option for anyone with a tight or fixed budget who wants to know exactly what they’ll pay each month.
Bond yields are influenced by supply and demand in the bond market. Since Canadian government bonds are considered very safe investments, their prices (and therefore the interest they pay) help set the bar for fixed mortgage rates.
So, which is better—fixed or variable? It depends on your risk tolerance, your income stability, and your future plans. If you are not 100% sure, you might want to consider a shorter term fixed rate which is a happy medium between the two.