Understanding Mortgage Rates: Prime Rate, Bank Rate, and Fixed Rate Made Simple

When it comes to mortgages, terms like "prime rate," "bank rate," and "fixed rate" can feel confusing. Knowing what these rates mean and how they’re set can help you understand what affects your mortgage payments. Here’s a breakdown of each rate and how they work.

The Prime Rate: How Most Variable Rates Are Set

The prime rate is the starting rate that banks use to set variable mortgage rates, and it’s directly linked to the economy. Each bank’s prime rate often moves up or down when the Bank of Canada (Canada’s central bank) changes its rates.

If you have a variable mortgage, it’s often tied to the prime rate, like “prime minus 0.5%.” If the prime rate is 6.7%, your mortgage rate would be 6.2%. So, when the Bank of Canada makes changes to stimulate the economy or keep inflation in check, it affects the prime rate and your payments.

The Bank Rate: Canada’s Economic Steering Wheel

Also known as the overnight rate or policy rate, the bank rate is set by the Bank of Canada to help guide the economy. It’s the rate banks pay when borrowing money from each other overnight, and it influences all other rates, especially the prime rate. The Bank of Canada adjusts the bank rate to either encourage or discourage borrowing and spending.

• When the bank rate goes up: Borrowing costs more, which can slow down spending.
• When the bank rate goes down: Borrowing is cheaper, which can stimulate spending and growth.

The bank rate influences the prime rate but doesn’t directly set it. Banks still decide on their own prime rates based on their costs and the overall market.

Fixed Mortgage Rates: A Steady Choice, Tied to Bonds

Fixed mortgage rates don’t depend on the prime or bank rates. Instead, they’re based on bond markets. Bonds reflect investors’ views on long-term economic stability. When bond yields rise, fixed mortgage rates tend to rise too. When bond yields drop, fixed rates often drop.

Example: With a 3-year fixed rate of 4.44%, your rate and monthly payments are locked in for three years, regardless of what happens with the bank rate or prime rate.

Fixed rates are great if you want stable payments and protection from rising rates.

What This Means for You

• Variable Rate Mortgages: Your rate will go up and down with the prime rate. If the economy changes, so can your payments.
• Fixed Rate Mortgages: Your rate stays steady for the term, regardless of changes in the prime rate or economy.

Final Thoughts: Pick the Mortgage That Fits Your Life

The best mortgage rate depends on what’s important to you. If you’re comfortable with some changes in your payments, a variable rate might suit you. If you like the security of steady payments, a fixed rate could be better. Either way, understanding the basics of mortgage rates can help you make a confident choice.

Need Advice? We’re Here to Help

If you have questions, we’re here to walk you through your options and find the best rate for you. Reach out today to learn more.