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Mortgage Interest Rates

An explanation of how fixed and variable interest rates are determined and how to choose the best option for you

Variable Interest Rates

The Bank of Canada's overnight lending rate sets the cost for Canada's banks to borrow money from each other at the end of each business day. It is adjusted on predetermined meeting dates throughout the year as a way to control inflation.


Prime rate, which is what financial institutions use to set interest rates for variable mortgages, loans and lines of credit, is primarily influenced by The Bank of Canada's overnight lending rate, so when it goes up or down, you can expect Prime rate to follow. It's currently set at 6.7%, but some of the banks set theirs a bit higher. Variable rates are expressed as Prime + or - a certain amount.


We say variable, but there are actually variable rate mortgages and adjustable rate mortgages. Variable rate mortgages have payments that stay the same as Prime go up or down, so the amortization (total length of the mortgage) fluctuates when Prime changes.


Adjustable rate mortgages have payments that fluctuate as the changes to Prime occur, so the amortization stays on track.

Fixed Interest Rates

Fixed rate mortgages follow the trends of the corresponding bond yields, for example the 5 year fixed rate for a mortgage follows the 5 year bond yield.


Government bonds are low risk investment products and the bond yield is the annual return on those investments expressed as a percentage.

Variable vs Fixed

Typically variable rates are lower than fixed rates, but for the last little while it has actually been higher than most fixed terms. Historically, variable has outperformed fixed as you can see here:

Fixed vs Variable.jpeg

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But choosing variable or fixed entirely depends on a person's individual situation and risk tolerance!

When choosing between a variable and fixed rate mortgage, it is important to consider the advantages and disadvantages of each.


A variable rate mortgage allows you to benefit from market movements, meaning that if interest rates decrease, so will your payments. However, if interest rates increase, so will your payments.


On the other hand, a fixed rate mortgage provides stability and predictability; your payments will remain the same regardless of changes in the market.


Ultimately, it is important to consider your financial situation and risk tolerance when deciding between the two. 

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