How mortgage rates are determined in Canada: what moves fixed and variable rates

Short answer: Mortgage rates in Canada are determined by what it costs your lender to fund the loan, plus the lender's operating costs, its allowance for the risk you won't repay, and its margin ^[1]. The Bank of Canada doesn't set mortgage rates, but its policy rate influences them ^[1]. Variable rates follow the lender's prime rate; fixed rates are usually benchmarked to Government of Canada bond yields of a similar term ^[1][2][6]. That's why a fixed rate can move even when the Bank of Canada holds still.

This guide is for homeowners and buyers who want to understand why quotes move, and what is and isn't in their control. It's general information, and your own rate depends on your file, OAC.

The four building blocks of a mortgage rate

The Bank of Canada says funding cost is the largest part of your mortgage rate. The rest is the lender's operating costs and how much it needs to cover the risk that a loan isn't repaid ^[1]. Lenders also add a margin for profit. Put simply:

Why fixed rates follow bond yields

A fixed-rate lender is promising a rate for the whole term, so it prices off the cost of money for a similar length of time. Canadian fixed-rate mortgages are generally benchmarked to Government of Canada bond yields, with the 5-year yield the usual reference for a 5-year term ^[6]. Bond yields move daily with expectations about inflation, future Bank of Canada decisions and global markets, so fixed rates can change between Bank of Canada announcements. The Bank's 5-year benchmark yield was 3.46% on November 10, 2026 ^[5].

In our experience, this is the most common surprise for borrowers: fixed offers can rise or fall in the weeks before a Bank of Canada decision, because the market has already priced in what it expects.

Why variable rates follow prime

A variable rate is usually set as the lender's prime rate plus or minus a discount. Each lender sets its own prime, as a function of its cost of funding, which the Bank of Canada's target for the overnight rate influences. The prime rate the Bank publishes is the most common prime rate among the six largest banks ^[2].

The Bank of Canada raised its policy rate by 0.25 points to 2.50% on October 28, 2026, and its next scheduled announcement is December 9, 2026 ^[3]. The published prime rate was 4.70% on November 11, 2026 ^[4]. If your mortgage has adjustable payments, the payment changes when prime changes; with fixed payments, more of each payment goes to interest instead ^[7].

Want to see how the pieces add up for your file? A licensed 8Twelve agent can compare fixed and variable options across 65+ lenders, OAC. See current rate information

Worked example: how the pieces change a payment

Example (illustrative): a $400,000 mortgage amortized over 25 years. We assume a lender spread of 1.00 point over the 5-year yield of 3.46% ^[5], which gives a fixed rate of 4.46%. For the variable rate, we assume a 0.50-point discount from the published prime rate of 4.70% ^[4], which gives 4.20%. The spread and discount are assumptions for the math, not quotes. Payments use semi-annual compounding for both, which simplifies how variable rates are often calculated.

The same market event can affect two borrowers differently. A homeowner mid-term on a fixed rate feels nothing until renewal; a variable borrower feels it at the next payment; a buyer about to sign feels the bond-yield move. Our fixed vs variable guide helps you weigh those risks.

What lenders look at beyond the benchmark

Two borrowers can see the same benchmark and still get different rates, because lenders price the risk and the product. In our experience, lenders typically weigh:

• Credit and income. A stronger, more stable file usually gets better pricing; a weaker one may be priced for the extra risk.
• Down payment or equity. Insured and lower loan-to-value mortgages tend to carry lower risk for the lender.
• The product. Term length, prepayment privileges, portability and whether the rate can be held all affect price. Our term length guide and prepayment privileges guide explain the trade-offs.
• Volume and channel. Rates and discounts differ between lenders and channels, which is one reason comparing matters.

What you can control

1. Your timing. Rate holds are common on purchases and renewals; ask how long yours lasts. Our guide to mortgage rate holds explains how they work.
2. Your file. Pay down revolving debt, avoid new credit before applying, and have income documents ready.
3. Your term and product. A slightly higher rate with better flexibility can cost less than a lower rate you may need to break.
4. Your comparison. Get written offers for the same term, type and prepayment terms, then compare total cost, not just the rate. Our renewal negotiation guide shows how.

Common myths about how rates are set

• "The Bank of Canada sets my mortgage rate." It doesn't. It influences short-term rates, which feed into prime, and shapes market expectations that feed into bond yields ^[1].
• "All banks have the same prime rate." Each institution sets its own; the published figure is the most common of the six largest ^[2].
• "A rate cut means my fixed rate falls." Not until you renew or refinance, and new fixed offers follow bond yields rather than the policy rate.

To understand how mortgage rates are determined in Canada, remember the split: bond yields for fixed, prime for variable, and a lender's cost, risk allowance and margin on top. Watch the benchmark that matches the product you hold or plan to buy, and compare written offers.

This article is for general information only and isn't financial, legal or tax advice. Rates, products and terms change without notice and are available on approved credit (OAC). The rate and terms you qualify for depend on your individual financial situation, including credit, income, property and loan-to-value. "Best rates" means the most suitable options available for your situation, not a guarantee of the lowest rate. Examples are for illustration only, as of November 13, 2026, and are not an offer. 8Twelve Mortgage arranges mortgages through 65+ lenders and does not lend directly. Licensed across Canada — see our licences.

Rates and yields cited are from the Bank of Canada: policy rate 2.50% (decision of October 28, 2026), prime rate 4.70% (November 11, 2026) and the 5-year benchmark bond yield 3.46% (November 10, 2026), checked November 13, 2026. The lender spread, prime discount and payment figures in the worked example are assumptions, and the lender practices described reflect our experience; they vary by lender.