What Really Controls Mortgage Rates in Canada?
If you’ve ever wondered why mortgage rates move the way they do, you’re not alone. Many Canadians think banks just make up rates as they please, but that’s not true. Mortgage rates are tied to two main things: the Bank of Canada’s overnight rate and the bond market. Let’s break it down in plain English.
Fixed Rates and the Bond Market
When you hear about “fixed mortgage rates” changing, it’s because of the bond market.
The Government of Canada issues bonds to borrow money - if you think of it this way, bonds are essentially government debt. Investors buy these bonds because they’re safe - nothing is more secure than lending money to your country.
The interest the government pays on these bonds is called the bond yield.
Mortgage lenders watch those yields closely.
Why? Because when they lend you money for a 5-year fixed mortgage, they often fund that loan by selling a 5-year government bond.
So if the yield goes up, lenders charge you more. If it goes down, they can charge you less.
Important to know: If you already signed a fixed-rate mortgage, your rate is locked in for your entire term. Bond yields can rise or fall, but your payments don’t change until renewal. It only affects new fixed mortgage offers.
Quick Note: What Are Bond Yields?
Think of bond yields like supply and demand at an auction - but in reverse. The government acts as an auctioneer of sorts if you want to think about it (maybe a crude way of illustrating it, but hopefully helps understand) - finding a buyer who will be willing to accept the lowest amount of returns, or yields - so Canada pays the least amount of interest possible on their bonds that they sell. After all, the government doesn’t want to overpay on interest especially considering they’re trying to keep debt in check.
When everyone wants bonds (like during a financial crash when investors rush to “safe” places), the government doesn’t need to offer much interest to sell them. Everyone wants them! Thus, yields drop.
When fewer people want bonds, the government has to offer higher interest rates to attract buyers. Yields rise.
Since fixed mortgage rates follow these bond yields, your mortgage rate goes up when yields climb and down when they fall.
Variable Rates and the Overnight Rate
Variable mortgages (and lines of credit) are directly tied to the Bank of Canada’s overnight rate - the rate banks charge each other for one-day loans.
Why does this matter? Because every time the Bank of Canada adjusts its target overnight rate (the benchmark it sets 8 times a year), lenders follow by moving their prime rate. And when prime changes, your variable mortgage or HELOC changes too.
Think of it like this: banks shuffle billions every day. Some end the day short on cash, others have extra. They lend to each other overnight to balance things out, and the rate they use hovers right around the Bank of Canada’s target. By nudging that target up or down, the Bank steers borrowing costs for the entire economy.
For you, the takeaway is simple:
When the target overnight rate rises, your variable mortgage payment usually goes up.
When it falls, your payment gets lighter.
That’s why every Bank of Canada announcement matters - if you’re in a variable rate mortgage, your payments can change almost immediately.
Real-Life Examples
If the Bank of Canada raises the overnight rate by 0.25%, expect your variable mortgage payment to rise almost right away.
If 5-year bond yields suddenly drop, lenders may lower their 5-year fixed rates - so if you’re shopping for a mortgage or coming up for renewal, you could save money.
Remember - you don’t need to work in the Toronto Financial District to have an understanding on what controls mortgage rates in Canada!
What Moves the Bond Market and Overnight Rate?
Here’s where it gets interesting. These numbers don’t move randomly, they respond to major economic events.
2008 financial crisis: Investors fled to “safe” government bonds. Bond yields collapsed, and fixed mortgage rates followed.
COVID-19 pandemic: The Bank of Canada slashed the overnight rate to near zero to keep money flowing, which sent variable mortgage rates down too.
Global events: Wars, oil price crashes, or U.S. job numbers can all shake investor confidence. That pushes money into or out of bonds, which moves yields, and your fixed rates.
Why a Mortgage Broker Can Help
Here’s the part most people miss. Timing matters - a lot.
A good broker can hold a rate for up to 120–130 days before your renewal. That protects you if bond yields spike and rates climb before your maturity date.
If rates go down instead, brokers can request rate drops so you still get the best deal.
And while lenders don’t usually play bait-and-switch once they put a rate in writing, they do inflate their first offers. Brokers know the market and can push back.
At the end of the day, you don’t need to follow every twist of the bond market or every Bank of Canada announcement. But you do need someone in your corner who does - and who knows how to use that knowledge to your advantage.
Let’s create a strategy that works for you. Let’s chat today.
Jeff Dinsmore
Mortgage Broker
FSRA # 10315
VeloMortgage.ca
TMG - The Mortgage Group