Hailey Johnson
The Bank of Canada's (BoC)' policy rate, also known as the overnight rate, influences short-term interest rates and, in turn, variable mortgage rates. The overnight rate is adjusted on eight fixed dates each year. The BoC's lending rate influences the interest rate that banks charge customers on loans and mortgages. When the BoC cuts its lending rate, it becomes cheaper for Canadians to borrow money. However, banks do not always pass on the full benefit of these cuts to their customers. For example, in 2015, the banks only cut their rates by 0.15% when the BoC cut rates by 0.25%. While the BoC's rate cuts can provide some relief to borrowers, they also need to consider the broader economic context, such as inflation and market uncertainties.
| Characteristics | Values |
|---|---|
| Bank of Canada's (BoC's) policy rate | 2.75% |
| Date of next rate decision | September 17, 2025 |
| Expected rate drop by end of 2025 | 2.25% |
| Bank prime rate | 4.95% |
| Variable mortgage rates | Influenced by BoC's overnight rate |
| Fixed mortgage rates | Follow the bond market |
| Inflation rate in July 2025 | 1.7% |
| Inflation target range | 1-3% |
| Canada's unemployment rate in June 2025 | 6.9% |
| GDP growth in Q2 2025 | Negative |
| Banks' response to rate cuts | May vary, but usually passed along to customers |
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What You'll Learn
Variable mortgage rates
The BoC typically increases its overnight lending rate to curb inflation and encourages savings, which helps bring inflation under control. Conversely, when inflation falls below the target of 2%, the BoC may lower the policy interest rate to stimulate the economy. Lenders then decrease their prime rates to encourage borrowing and spending.
Variable-rate mortgages (VRMs) are influenced by the lender's prime rate, which is determined by the BoC's policy rate. As a result, VRMs can be cost-effective options for borrowers who are comfortable with payment fluctuations. However, it's important to note that variable mortgage rates may not always exactly match the BoC rate changes, and there have been instances where banks have not reduced their rates despite the BoC's rate cuts.
In the context of the recent BoC rate cuts, some lenders have been reported to adjust their variable rate mortgages immediately, while others have policies to change the rate in the following month. It is recommended to consider the specific policies of different financial institutions when it comes to their variable rate mortgages.
Additionally, it's worth noting that fixed mortgage rates are based on bond yields rather than the BoC's policy rate and are not directly impacted by the BoC's announcements. However, central bank cuts do influence the overall market, pushing down rates for fixed-rate mortgages as well.
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Bank prime rates
The prime rate is the interest rate that banks use as a basis to set rates for different types of loans, credit cards, and lines of credit. It is among the most widely used benchmarks in setting home equity lines of credit and credit card rates. It is based on the federal funds rate, which is set by the Federal Reserve. Banks use different methods to determine what is the applicable rate for each product and when adjustments will be made. The prime rate can affect many areas of an individual's life, including credit card interest rates, small business loans, mortgages, and personal loans. It serves as a baseline that most banks use to determine the interest rate to give customers who want to open a new credit card or take out a loan.
The Bank of Canada's (BoC's) policy rate, also known as the overnight rate, influences bank prime rates, which in turn move variable mortgage rates. Fixed mortgage rates follow the bond market, which can anticipate changes to the prime rate. The Bank of Canada carries out monetary policy by influencing short-term interest rates, adjusting the target for the overnight rate on eight fixed dates each year. The BoC cut 0.25 basis points in 2024, and there are hopes that it will cut its rate again in September 2025.
The prime rate is determined by each lender, and it is the rate at which each bank deems to be its 'best' rate after accounting for costs and including a small margin. It is worth noting that the prime rate is not always the lowest, best, or favored rate of interest. Banks do not always immediately match cuts in the BoC rate, and there may be a lag in changes to payment amounts.
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Fixed mortgage rates
In a volatile rate environment, deciding between a fixed or variable-rate mortgage can be challenging. Variable-rate mortgages typically follow the central bank's interest rate more closely, while fixed rates may have already adjusted based on market expectations. Those with variable-rate mortgages benefit from interest rate cuts, as their monthly mortgage payments decrease. On the other hand, a fixed-rate mortgage protects borrowers from future rate increases but does not offer the benefit of future rate cuts.
The decision between a fixed or variable-rate mortgage depends on an individual's financial goals and risk tolerance. Homeowners should consider seeking guidance from a mortgage advisor to understand how BoC announcements and economic conditions may impact their choices. Additionally, factors such as bond yields, unemployment numbers, and bank competition can influence fixed mortgage rates.
While predicting interest rates can be challenging, understanding the underlying factors can help prepare and protect mortgage clients. For example, in a high-inflation environment, the central bank may raise interest rates to cool the economy, which can lead to higher short-term bond yields and fixed mortgage rates. On the other hand, if there are concerns about a recession, central banks may lower the prime rate to stimulate the economy, resulting in lower long-term bond yields and potentially lower fixed mortgage rates.
In summary, fixed mortgage rates are influenced by bond yields and market expectations of future economic conditions. While BoC rate cuts can indirectly affect fixed mortgage rates, the impact may not be immediate, and the decision between a fixed or variable-rate mortgage depends on individual financial goals and risk tolerance.
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Bank of Canada's monetary policy
The Bank of Canada's monetary policy is centred on an inflation-control target, aiming to keep inflation low, stable, and predictable. This target, which has a midpoint of 2% and a control range of 1-3%, was first introduced in 1991 and is reviewed every five years. The Bank of Canada and the federal government agreed to renew the monetary policy framework until December 31, 2026.
The Bank's Governing Council, acting independently of the government, is responsible for the day-to-day conduct of monetary policy. The Bank carries out this policy by influencing short-term interest rates and adjusting the target for the overnight rate on eight fixed dates each year. These adjustments are made based on core inflation measures, such as CPI-trim and CPI-median, which exclude volatile components and reflect the underlying trend of inflation.
The Bank of Canada's monetary policy tools can affect demand by influencing factors such as the exchange rate, which provides a buffer for the economy to adjust to shocks. These tools are used to support Canadians by promoting price stability and maximum sustainable employment.
In terms of matching the Bank of Canada's rate drop, big banks typically adjust their rates after the completion of the next batch cycle. While there have been instances where banks did not fully match the rate cuts, such as during the financial crisis, it is generally observed that they tend to pass on the cuts to customers, albeit with some delay.
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Impact on borrowing costs
The Bank of Canada (BoC) adjusts its interest rates to influence the rate of inflation. When the BoC raises its rates, borrowing money becomes more expensive, causing people to reduce their spending. This helps to reduce demand and slow down the pace of inflation. On the other hand, when the BoC lowers its rates, the cost of borrowing decreases, providing financial relief for borrowers and loan owners.
The BoC's policy rate, also known as the overnight rate, serves as a benchmark for financial institutions to set their interest rates. These rates affect consumer debt, including loans and lines of credit, as well as variable mortgages. A decrease in the BoC's overnight rate leads to a reduction in bank prime rates, resulting in lower interest rates for variable mortgages.
The impact of the BoC's rate drop on borrowing costs is particularly significant for individuals with variable-rate mortgages. When the BoC lowers its benchmark rate, the interest rates on variable mortgages also decrease, leading to a reduction in monthly mortgage payments. This provides financial relief for homeowners with variable-rate mortgages.
Additionally, the BoC's rate drop can influence the interest rates offered by lenders on loans and lines of credit. Borrowers with a strong credit history may benefit from more favourable rates, as lenders often provide lower rates to individuals with a solid credit profile. This creates an opportunity for Canadians to reduce the interest they pay on their debts and save money.
While the BoC's rate drop directly impacts variable mortgages, fixed-rate mortgages are influenced by different factors. Fixed mortgage rates are primarily driven by the bond market and tend to follow the movements in bond yields. However, fixed-rate mortgages can also be affected by the prime rate set by banks, which takes into account the BoC's overnight rate.
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Frequently asked questions
The Bank of Canada's (BOC) overnight rate affects bank prime rates, which in turn move variable mortgage rates. While the BOC influences short-term interest rates, the prime rate is determined by each lender. Banks generally match the BOC rate drop, but there have been instances where they have not, such as during the financial crisis when banks skimmed 0.2%.
As of July 30, 2025, the BOC rate is at 2.75%, with the next rate decision on September 17, 2025. There are expectations for the rate to drop further in the fall if inflation remains stable.
The BOC adjusts its policy rate to influence monetary policy and stimulate or constrain economic activity. Factors such as inflation, GDP growth, trade tensions, and unemployment rates impact the BOC's rate decisions.
