Understanding Mortgage Rates: What Impacts the Interest Rate You Pay?

Welcome to Remortgaging.ca, where we simplify the intricacies of Canadian property finance for you. Today, we are delving deep into the realm of mortgage rates. A pivotal component of homeownership, the interest rate on your mortgage, can make a significant difference in your financial journey. Let’s explore the factors that shape these rates and how they impact you.

A Primer on Mortgage Rates

In its most basic sense, a mortgage rate is the amount of interest you’ll pay on your home loan. Expressed as a percentage, this rate is applied annually to the outstanding balance of your mortgage. For a homeowner, even a minor fluctuation in this rate can amount to thousands of dollars over the loan’s life.

1. The Central Bank & The Overnight Rate

The Bank of Canada, the nation’s central bank, plays an influential role in determining interest rates. The ‘overnight rate’—the interest rate at which major financial institutions borrow and lend one-day funds among themselves—is regularly set by the Bank of Canada. When this rate fluctuates, it has a cascading effect on interest rates throughout the banking system, including mortgage rates.

  • Hike in Overnight Rate: Typically leads to higher interest rates for borrowers.
  • Drop in Overnight Rate: May result in lower interest rates being offered to consumers.

2. Bond Market Dynamics

The bond market, especially the market for government bonds, is closely intertwined with fixed mortgage rates. When bond yields (essentially the return on investment for a bond) go up, fixed mortgage rates often follow suit. When bond yields decrease, mortgage rates may drop as well.

3. Lending Institutions & Their Requirements

While overarching economic factors play a role, individual lending institutions also have a say in mortgage rate determination:

  • Competition: If one lender drops its rates, others may follow to remain competitive.
  • Risk Evaluation: Lenders assess the risk associated with lending money. If they perceive higher risk, they might charge higher rates.

4. Loan-to-Value (LTV) Ratio

This ratio compares the amount you’re looking to borrow against the appraised value of the property. A higher LTV often means the borrower has invested less of their own money into the property. This can sometimes result in a higher interest rate due to the perceived increase in risk.

5. Economic Conditions

The broader economic landscape can shape mortgage rates:

  • Inflation: High inflation can lead to increased mortgage rates.
  • Economic Recessions: During economic downturns, central banks might lower interest rates to stimulate borrowing and investment.

6. Credit Score: The Borrower’s Trustworthiness

Lenders look at a borrower’s credit score to gauge the likelihood of loan repayment. A higher score often results in better mortgage rates, while a lower score might lead to elevated rates.

7. Mortgage Type and Duration

The specifics of the mortgage product chosen can also impact rates:

  • Fixed vs. Variable: Fixed rates might be higher initially than variable rates but offer stability. Variable rates can fluctuate based on economic conditions.
  • Term Length: Generally, longer-term mortgages (like a 5-year term) might have higher rates compared to short-term mortgages due to the extended commitment.

8. Location of the Property

In Canada, where you live can influence mortgage rates. Some provinces or cities might have higher average rates due to economic conditions, housing demand, or regional regulations.

How to Navigate Mortgage Rate Changes

  1. Stay Informed: Keep an eye on announcements from the Bank of Canada and understand the broader economic indicators.
  2. Consult Experts: Mortgage brokers can provide insights on upcoming trends and help you secure favorable rates.
  3. Review Regularly: If you’re on a variable rate, or if your fixed term is ending soon, regularly review the market to see if switching or remortgaging could be beneficial.


The world of mortgage rates is influenced by a confluence of factors, from global economic conditions to individual financial health. While rates play a crucial role in determining monthly payments, it’s essential to view them as part of the broader homeownership picture. By understanding what drives these rates and staying proactive, Canadian homeowners can navigate the mortgage landscape with confidence. Remember, every percentage point matters, so arm yourself with knowledge and make it work in your favour. For more insights and assistance, keep coming back to Remortgaging.ca. We’re here to illuminate your path!

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