What Drives Fixed and Variable Mortgage Rates?

While many people think the Bank of Canada rate directly affects all mortgage rates, the truth is that variable and fixed rates are influenced by different factors.


Fixed rates are affected by the yields of government bonds. Since these bonds are considered safer investments than stocks, when there’s economic turmoil, investors move away from stocks to bonds. This increased demand for bonds increases their price which acts to decrease their yield or rate of return. If the price of five year bonds goes up, the resulting decrease in yield acts to lower the borrowing costs for mortgage lenders who can then reduce their five year fixed mortgage rate.

Unfortunately, these potentially lower rates are currently being offset by the liquidity crisis. Banks around the world are hesitant to lend to each other which results in higher borrowing costs for mortgage lenders, who then pass them on as higher fixed mortgage rates.

Generally, the Bank of Canada plays a bigger role in determining variable mortgage rates. By setting the Bank Rate, it controls the average rate for loans between financial institutions. Since institutions use this rate to set their prime rate, if the Bank Rate drops by 0.5%, the lenders’ prime rate usually drops by 0.5% too.

However, here again the liquidity crisis has discouraged institutions from lending to each other. As a result, lending rates between institutions have increased which means a Bank Rate decrease of 0.5% may only result in a lenders’ prime rate being reduced by 0.25%.

In such unusual times, it’s difficult to forecast mortgage rates. However, with the liquidity crisis beginning to ease and the Bank of Canada suggesting it may reduce the Bank Rate a little farther, most experts predict slightly lower rates, with variable rates declining a bit more than fixed rates.

Still have questions? For more detailed, personalized mortgage advice, give me call at (905) 529-1199


Lisette Amalfi, AMP
Mortgage Agent/Owner
OAC Mortgages Inc.
(905) 529-1199