Mortgage rates are a key factor in homeownership affordability, directly impacting monthly payments and overall borrowing costs. Understanding how mortgage rates are determined can help both homebuyers and those looking to refinance secure the best deal.

In this article, we break down the five key factors that shape mortgage rates in Canada and how they affect your home financing options.

1. The Bank of Canada’s Overnight Rate

The Bank of Canada (BoC) sets the overnight rate, which dictates how much financial institutions charge each other for short-term loans. Mortgage lenders use this rate as a benchmark to set their own interest rates.

How it impacts mortgage rates:

• When the BoC raises rates, borrowing becomes more expensive, leading to higher mortgage rates.

• When the BoC lowers rates, mortgage rates tend to follow, making borrowing cheaper.

The main reason the BoC adjusts rates is to control inflation. According to Steve Foot, Managing Partner at IQ Commercial Mortgage, mortgage rates have been one of the biggest contributors to inflation, with a 30% year-over-year increase. As inflation stabilizes, rate cuts are expected to bring relief to homebuyers.

2. Bond Yields & Market Conditions

The Government of Canada bond market is another major driver of mortgage rates, particularly for fixed-rate mortgages.

How bond yields affect mortgage rates:

• If bond yields rise, mortgage rates increase.

• If bond yields drop, mortgage rates decline.

Market conditions such as economic outlook, investor sentiment, and global financial events influence bond yields, often predicting mortgage rate changes before the BoC officially adjusts its rates.

3. Lender-Specific Factors

Not all lenders offer the same mortgage rates. Banks, credit unions, and private lenders each assess risk differently.

Factors that affect mortgage rates at the lender level:

✔ Credit score – Higher scores = better rates.
✔ Loan-to-value (LTV) ratio – A larger down payment can lead to a lower rate.
✔ Income stability – Steady income improves lending terms.

Each lender competes for borrowers, which is why shopping around can help secure a lower rate.

4. Mortgage Term & Type

Your choice of mortgage term and type also impacts the interest rate you receive.

Fixed vs. Variable Rates:

• Fixed-Rate Mortgages: Rates stay the same for the entire term, offering stability.

• Variable-Rate Mortgages: Rates fluctuate based on the lender’s prime rate, which follows the BoC’s rate changes.

Short vs. Long-Term Mortgages:

• Shorter terms (e.g., 1-3 years) often have lower rates, but require refinancing more frequently.

• Longer terms (e.g., 5-10 years) lock in rates for stability but may come at a slightly higher cost.

5. Government Regulations & Policies

The Canadian government influences mortgage rates through policies designed to regulate lending and housing affordability.

Key policies impacting mortgage rates:

• Mortgage stress tests require borrowers to qualify at a higher rate to ensure affordability.

• Housing policies & economic stimulus can affect supply, demand, and overall lending conditions.

Final Thoughts: How to Stay Ahead of Mortgage Rate Changes

Understanding the factors that drive mortgage rates can help you make smarter home financing decisions. By keeping an eye on the Bank of Canada’s announcements, bond yields, and lender trends, you can better time your mortgage application for the most competitive rate.

Looking for the best mortgage options? Explore Zown for expert guidance and home financing solutions tailored to your needs.

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