How lenders set your mortgage rate

Two people buying the same house on the same day can be offered different mortgage rates. The rate is built in layers: a benchmark that moves with the economy, a margin the lender adds, and adjustments for you and your mortgage. Knowing the layers shows you which parts you can influence.

The short version: fixed rates start from bond yields, variable rates start from prime, and the lender adds a margin. A larger down payment, insured or insurable status, a strong credit profile and some shopping around can narrow that margin.

Layer 1: the benchmark

• Fixed rates follow the yield on Government of Canada bonds with a similar term. A five-year fixed rate tracks the five-year bond yield. When that yield rises, lenders raise fixed rates, often before the Bank of Canada does anything.
• Variable rates are set from the lender's prime rate. Prime follows the Bank of Canada's policy rate, with major banks currently about 2.20 percentage points above it. See today's Bank of Canada rate and what to expect.

Layer 2: the lender's margin

On top of the benchmark, the lender adds a margin to cover its funding costs, the risk of loans going bad, the cost of running the business and a profit. For example, if the five-year bond yield is 3.35% and a lender offers a five-year fixed rate of 3.99%, the margin is 0.64 points. A variable rate is usually quoted against prime, such as prime minus 1.05%, which is 3.40% when prime is 4.45%. These are examples, not offers.

Layer 3: you and your mortgage

• Down payment and insurance. With less than 20% down, your mortgage is insured against default, and the lender takes less risk, so insured rates are often the lowest. Mortgages that are insurable, with 20% or more down and meeting insurance rules, can also get good rates. Uninsured mortgages usually cost more. See mortgage default insurance.
• Credit profile. A strong credit history, stable income and moderate debts help you qualify for the best rate.
• Term and type. The rate differs by term, from one to ten years, and by fixed, variable or adjustable. See fixed or variable.
• Amortization. Longer amortizations, and in some cases a refinance or a rental property, can come with a higher rate.
• Purchase, renewal or refinance. Lenders often price a new purchase differently from a renewal or a refinance.
• Features. A mortgage that is open, portable, or has a short rate hold may cost more than a plain closed one. See open or closed.

Posted rates and discounted rates

Banks publish a posted rate that few borrowers pay. Most get a lower discounted rate, and the gap is where negotiating matters. The posted rate also matters later, because some lenders use it to calculate the penalty if you break a fixed mortgage early. See mortgage penalties explained.

How to get a better rate

• Compare several offers. Ask your bank, a second bank and a mortgage broker. See mortgage broker or bank.
• Ask for a rate hold when you are pre-approved so a rise in rates does not catch you before closing. See mortgage pre-approval.
• Improve your profile before applying: pay down debts, avoid new credit and keep your payments on time.
• Compare the whole mortgage, not only the rate: the penalty, prepayment options and term.
• At renewal, shop again. Staying with your lender without asking often costs more than switching.

What a small difference costs

A quarter-point difference is worth about $50 a month on a $400,000 balance with 20 years left, and more if the balance is bigger. Over a five-year term that is roughly $3,000. Try your own numbers in our mortgage calculator, and change the interest rate to see the effect.

Rates change daily, and each lender decides its own. Use this guide to understand the pricing, then check current offers.

Sources: Bank of Canada: policy interest rate, CMHC: mortgage loan insurance.