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The time has come that you can finally afford your dream home. You have worked hard and saved and are ready to sign the fine print of your mortgage contract. But mortgage rates? What are they and how do they impact your homeowner experience?
Canadians who take out any form of loan or line of credit will have experience with the various fees or interest rates that come along with it. Unfortunately, money is not loaned out for free, your lender expects to make money. Understanding how mortgage rates work is critical for getting the best deal.
There are many different forms of mortgages you can choose from so it is important to know the difference between mortgages, how their rates vary, and how they can affect what you pay for your home. Our guide will break down all things mortgage rates to make sure you get the best bang for your buck.
What are mortgage rates?
If you are looking for a quote on mortgage rates, current rates are available at the top of this page. Keep in mind that there is more to a mortgage than just the rate.
Mortgage rates refer to the percentage of interest charged on a mortgage. This varies from lender to lender and on the type of mortgage you choose. Similar to a credit card, mortgage rates are determined by the lender and can be either fixed rates, staying the same for the term of the mortgage or variable rates that fluctuate.
Mortgage rates also vary between borrowers based on their application and credit profile. The higher your credit score, the better the mortgage rate you will get. Mortgage rate averages also rise and fall with interest rate cycles and can drastically affect the homebuyers' market.
How do mortgage rates work in Canada?
At its most simple, a mortgage rate is the interest you pay your lender for the use of their money.
In Canada, a mortgage is a type of loan given by a bank or mortgage lender for the purchase of a home. It allows you to get into a home without having to save up for the whole purchase price. The home acts as collateral for the money you are borrowing, meaning if you cannot afford to pay the mortgage, the bank or lender will take the home back. While this sounds scary, securing the mortgage against the property minimizes the risk to the lender. In turn, they can give much more generous interest rates and lend to more borrowers.
As with any other form of credit, however, credit is not given for free. The interest rate is what you have to pay in exchange for taking on the loan.
Purchasing a home and choosing a mortgage is likely one of the largest decisions you will make in life.
Some things you’ll want to consider:
- Type of mortgage: Fixed rate or variable rate, open or closed.
- Mortgage term: The length of time a mortgage rate, lender and conditions set out by the lender are in effect. Typically terms range from six months to up to 10 years.
- Amortization period: The total length of time it will take you to pay off your mortgage, typically people choose 25 or 30 years amortization periods.
A longer amortization period usually means lower monthly mortgage payments. It also means you’ll pay more interest overall. You’re taking longer to pay back the mortgage principal to the lender so interest has more time to accrue.
What is a fixed rate mortgage?
With a fixed-rate mortgage, the interest rate and your mortgage payment will remain the same throughout your mortgage term. Unlike variable-rate mortgages, a fixed-rate mortgage does not fluctuate with the market. So the interest rate in a fixed-rate mortgage stays the same regardless of where interest rates go, up or down.
As an example, if you have a mortgage with a 5% fixed interest rate means that you will pay 5% until it is time to renew. This can give you financial peace of mind, knowing that your rate won’t go up before your term is done. On the other hand, at signing you will lock in a higher rate than the going variable rates at the time of signing.
How do variable mortgage rates work?
A variable-rate mortgage is a type of home loan in which the interest rate is not fixed. Instead, interest payments will be adjusted at a level above a specific benchmark or reference rate. In Canada, this is the prime rate set by the Bank of Canada. Lenders can offer borrowers variable-rate interest over the life of a mortgage loan.
With a variable-rate mortgage, your mortgage payment will stay the same throughout your mortgage term, but the interest rate can go up and down along with the prime interest rate.
How often do variable-mortgage rates change?
In Canada, variable-mortgage rates fluctuate according to Canada’s prime rate.
The Bank of Canada updates the prime rate as many as 8 times per year. This works out to roughly every seven weeks. In 2022 these interest rate announcements fall on:
- January 26
- March 2
- April 13
- June 1
- July 13
- September 7
- October 26
- December 7
Some lenders may have terms that change every six months. This means that the variable interest rate on your mortgage may not rise or fall immediately after a change in the prime rate.
Remember that with an open variable rate your automatic payments will also adjust automatically.
Which bank has the best mortgage rates?
If you have done any banking in Canada, you are already familiar with the Big Five Banks. The Big Five Banks is a term used in Canada to describe the five largest banks:
- RBC: Royal Bank of Canada
- BMO: The Bank of Montreal
- CIBC: Canadian Imperial Bank of Commerce
- Scotiabank: The Bank of Nova Scotia
- TD: Toronto-Dominion Bank
There are also mortgage brokers, both traditional ones and new online ones like Nesto, that will help you find the best fixed and variable rates from the Big Five and dozens of other lenders. Who has the best rates will be constantly varied. This is because interest rates are determined by national and world market forces, which means there are a number of reasons mortgage rates are different for different lenders. These include lender overhead costs, closing costs and mortgage bankers' experience, among other factors.
Use the mortgage rate comparison tool at the top of this page to find the bank that has the best mortgage rate that suits your financial needs.
When will mortgage rates go up in Canada?
Canadians can see as many as eight interest rate adjustments per year.
While Canadians have been fortunate to not see any increase to mortgage rates over the last two years, mostly due to low rates during the COVID-19 pandemic, the Bank of Canada began raising their interest rates effective March 2022.
As a rule of thumb, when the Bank of Canada changes the policy interest rate, it sets off a chain reaction that affects lending rates from every bank. Each bank determines its own “prime lending rate,” which is itself primarily influenced by the Bank of Canada's policy interest rate.
How are mortgage rates calculated?
How mortgage rates in Canada and beyond are calculated can be extremely confusing to many people. However, interest rates are all around us so it’s important to understand them. They are especially important when it comes to purchasing a home and having to shop for the best mortgage rate.
Banks calculate the interest rates on the money they lend. So for example, for a fixed-rate mortgage, the bank will base the interest rates on what they are getting on the money they have invested (bond rates). They will then use those potential earnings from bond investments to cover their costs and possible losses incurred through a mortgage. The higher the rates the bank has to pay, the higher your mortgage rates will be.
The most simple explanation is that loans are usually very simple to deal with since the interest is compounded with every payment. That being said, if you have a loan at 6%, with monthly payments then compounding simply requires using a rate of 0.5% per month (6%/12 = 0.5%).
Unfortunately, mortgages are not always as simple. Except for variable-rate mortgages, all mortgages are compounded semi-annually, by law. The ins and outs of how other mortgage rates are compounded and calculated should be discussed with your broker or lender, especially in regard to your specific mortgage.
You can use our mortgage payment calculator to see how mortgage rates affect your payments. We recommend talking directly to your broker or lender to make sure you understand your mortgage rate and how it will impact your mortgage payment.
Why compare mortgage rates?
When you are finally ready to find your home, before you get started shopping, it is wise to know what the current mortgage rates are. After all, your rate will dictate how much interest you can expect to pay over the life of your term.
For example, higher interest rates make loans and mortgages more expensive. Homeowners in cities with high-priced real estate, like Vancouver and Toronto, can end up paying hundreds of thousands of dollars more than they borrow over the lifetime of their mortgage. Even small changes to the terms can mean saving tens of thousands of dollars over a 25-year amortization.
How does our comparison of mortgage rates in Canada work?
If you want to compare mortgage rates, you can compare rates from Canada’s best mortgage lenders within just a few seconds. Did we mention it is completely anonymous? All you have to do from there is compare rates and lenders, then click to continue.
Our tool allows you to choose the amortization period along and it will also calculate your estimated monthly repayments.
We continually update the mortgage rates so that you can be assured you are getting up-to-date rates on the market.