Posted On Dec 17, 2024

How the Bank of Canada’s Rates Impact Fixed and Variable Mortgages

Understanding how the Bank of Canada (BOC) sets interest rates and how this affects your mortgage is essential to making informed decisions about your home financing. Let’s break down the process and its impact on fixed and variable-rate mortgages.

How the Bank of Canada Sets the Overnight Rate

The Bank of Canada sets the overnight lending rate, which is the interest rate banks use to lend money to one another. This rate directly influences the prime rate that banks offer to their customers for loans, lines of credit, and variable-rate mortgages.

  • When the BOC raises the overnight rate, banks typically increase their prime rates.

  • When the BOC lowers the rate, banks often follow by reducing their prime rates.

Impact on Variable-Rate Mortgages

A variable-rate mortgage is tied to your lender’s prime rate. When the BOC raises or lowers its overnight rate:

  • Rates Increase: Your mortgage payment can rise, or a larger portion will go toward interest rather than principal.

  • Rates Decrease: Your payments may shrink, or more will go toward paying down your principal.

If you want to understand more about adjustable-rate mortgages, check out my detailed article: What is an Adjustable Rate Mortgage?.

How Fixed-Rate Mortgages Are Influenced

Fixed-rate mortgages, on the other hand, are primarily influenced by the 5-year bond yield rather than the overnight rate. Banks use bond yields to determine the interest rates for fixed-rate mortgages.

  • If bond yields rise, fixed mortgage rates tend to increase.

  • If bond yields fall, fixed mortgage rates typically decrease.

Fixed vs. Variable Rates

Choosing between a fixed-rate and variable-rate mortgage depends on your financial goals and risk tolerance. For a deeper comparison, read my article: Fixed-Rate vs. Variable-Rate Mortgages: Which One Is Right for You?.

What Happens When the Bank of Canada Cuts Rates?

When the Bank of Canada lowers rates, variable-rate mortgage holders often benefit from lower interest payments. To see what this means in real terms, read my article: What the Bank of Canada’s Rate Cut Means for Variable-Rate Mortgage Holders.

Final Thoughts

The Bank of Canada’s rate decisions and bond yields play a significant role in determining both fixed and variable mortgage rates. Understanding this can help you make smarter financial decisions when choosing a mortgage.

If you’re unsure whether a fixed or variable rate is right for you, let’s connect and find the mortgage strategy that aligns with your goals.

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