How Fixed Mortgage Rates Are Set: Bond Yields and Lender Costs

When fixed mortgage rates move, the reason is usually in the bond market, not at the Bank of Canada. Here is how lenders build a five-year fixed rate from the five-year Government of Canada bond yield and their own costs, why posted and discounted rates differ, and what that means when you shop for a mortgage.

The short version

Where the money for your mortgage comes from

A lender has to raise the money it lends you, and the Bank of Canada says this funding cost makes up most of the interest rate on your mortgage. The money comes from depositors and investors, in Canada and abroad. In a November 2024 speech on the mortgage market, the Bank's Senior Deputy Governor described how lenders fund a mortgage:

• Deposits. To limit their interest rate risk, lenders want to fund a mortgage with a deposit of about the same size and term, so a five-year fixed mortgage would ideally be matched with five-year money.
• Selling to investors. A lender can also turn mortgages into securities and sell them. For insured mortgages, the federal NHA mortgage-backed securities program (since 1987) and the Canada Mortgage Bond program (since 2001) were set up to make more funding available, and investors benefit because every mortgage behind them is insured.

Either way, the lender's cost depends on what money costs for the length of your term, and that is where bond yields come in.

Why the five-year bond yield matters

In the same speech, the Senior Deputy Governor said Canadian fixed-rate mortgages are generally benchmarked off five-year government bond yields. Five years is the usual term here: a typical Canadian mortgage has a 25-year amortization and a five-year term, and she attributed the popularity of the five-year term in large part to the Interest Act. On a term longer than five years, the borrower has the right to repay in full after five years, with a penalty of no more than three months' interest, so lenders that offer longer terms hold more interest rate risk and generally charge more for them.

Because the yield comes from trading in the bond market, it can change every business day. The Bank of Canada publishes benchmark Government of Canada yields, including the five-year, based on closing market yields, and it notes that funding costs are largely driven by interest rates in Canada and abroad. In 2019, for example, Canadian five-year fixed rates fell in response to falling interest rates in other countries.

Bank of Canada staff use the same idea. In a 2025 analysis of mortgage renewals, they modelled a fixed renewal rate as the Government of Canada bond yield plus a spread they assumed would stay constant. Here is what that means with example figures, compounded semi-annually, on a $500,000 mortgage with a 25-year amortization:

• The starting point. An example yield of 3.00% plus an example spread of 1.50% gives a rate of 4.50%, and a payment of $2,767.36 a month.
• The yield rises. If the yield goes up by 0.25 percentage points (25 basis points, each one a hundredth of a percentage point) and the spread stays the same, the rate becomes 4.75%. The payment rises to $2,837.28, about $70 more a month and about $6,000 more interest over a five-year term.

What goes into the spread

The spread is the lender's margin over the bond yield. The Bank of Canada and the Financial Consumer Agency of Canada (FCAC) point to what it has to cover:

• Funding costs. Investors' mood matters as well as the benchmark: in the early days of the pandemic, the Bank notes, the cost of funding jumped as investors became nervous. So mortgage rates and yields don't always move together point for point.
• The risk that you won't repay. The rate has to cover that risk. A high credit score can help, because it shows the lender you have been good at repaying your debts.
• Insured or uninsured. If your mortgage is more than 80% of the home's value, you need mortgage default insurance. Because it protects the lender, the Bank says, you may get a lower rate than on an uninsured mortgage, and Bank of Canada data on new mortgage lending in 2025 show rates on insured fixed-rate mortgages of five years or more below those on uninsured ones. I explain the insurance in Mortgage Default Insurance.
• The term. FCAC says lenders typically offer higher rates for longer terms, though not always.
• Operating costs and profit. The cost of running the lender's business, and the profit it makes on the interest you pay.
• Competition. You have a choice of lenders, and the Bank says you will most likely find a lower rate if you do your homework and are willing to negotiate.

Posted rates and discounted rates

FCAC describes the posted rate as the rate lenders advertise for their products, and notes that posted rates can change regularly. A discounted rate is one lower than the lender's posted rate.

• What people actually pay. Each week, the Bank of Canada publishes the most typical posted rates at the six largest banks. Its data on new mortgage lending in 2025 show the rates actually charged on fixed-rate mortgages of five years or more running well below the typical posted five-year rate.
• Ask for the discount. FCAC suggests asking your lender whether it can offer a discounted rate, which could save you thousands of dollars. In the example above, a quarter of a point on $500,000 is about $70 a month.
• Why the posted rate still matters. If you break a fixed mortgage early, the penalty is usually the higher of three months' interest and the interest rate differential (IRD). FCAC says lenders typically work out the IRD with two rates, and the second is the current posted rate for a similar term, or that rate minus the discount you were originally offered. I explain penalties in Moving Before Your Mortgage Term Ends.

Where the Bank of Canada's policy rate fits

The Bank of Canada doesn't set mortgage rates, but it does have some impact on them. It adjusts its policy rate, the target for the overnight rate, on eight fixed dates each year, and that rate is the starting point for many of the interest rates that matter to Canadians.

• Variable rates follow it closely. A change in the policy rate leads to similar changes in short-term rates, including the prime rate banks use to price variable-rate mortgages, so a variable rate generally moves when your lender's prime rate does.
• Fixed rates follow it loosely. A policy-rate change can also affect long-term rates, especially if people expect it to last. Because bond yields can move every business day with expectations and with rates abroad, fixed rates can change between the Bank's announcements, and an announcement can leave them where they were.

I cover what rate changes mean for your budget in Understanding Interest Rates, and how to choose between the two rate types in Fixed or Variable?

What this means when you shop

• Watch the five-year yield, loosely. The Bank of Canada posts the benchmark five-year yield on its website. A sustained move can hint at where fixed rates are heading, but spreads change too, so treat it as a signal, not a forecast.
• Get a rate hold. FCAC says a pre-approval may lock in a rate for 60 to 130 days, depending on the lender. Ask how long the rate is guaranteed and whether you automatically get a lower rate if rates fall. See Why Mortgage Pre-Approval Matters.
• Compare discounted offers. Get written offers from more than one lender, or through a mortgage broker, and weigh the rate alongside the prepayment terms and how the penalty is calculated.

Questions buyers often ask me

Why do fixed rates change when the Bank of Canada hasn't moved?

Fixed rates are generally benchmarked off five-year Government of Canada bond yields, which can change every business day with interest rates in Canada and abroad and with what investors expect. The Bank's policy rate mainly drives prime and variable rates.

Does the Bank of Canada set mortgage rates?

No, lenders do. The Bank sets its policy rate on eight fixed dates a year, which moves prime and variable rates and can also affect longer-term rates, especially if people expect a change to last.

What is the difference between a posted rate and a discounted rate?

The posted rate is the rate a lender advertises, and a discounted rate is lower. Ask for a discount, and ask how posted rates are used in the penalty if you break the mortgage early.

Why can an insured mortgage have a lower rate than an uninsured one?

The insurance protects the lender if you don't repay, so the Bank of Canada says you may get a lower rate. Insured mortgages can also be funded by selling them to investors through federal programs.

Can I time my mortgage by watching bond yields?

Only roughly. The five-year yield shows which way the benchmark for fixed rates is moving, but the spread changes too. A pre-approval rate hold, which FCAC says may last 60 to 130 days depending on the lender, can protect you while you shop.

Getting ready to borrow? Read Choosing a Mortgage Term and Mortgage Broker or Bank?, or try my mortgage calculator to see what a quarter of a point means for your payment.

This article is general information, not financial advice. The details come from the Bank of Canada, including its published data, and the Financial Consumer Agency of Canada, and were current at the time of writing; the example uses example rates, compounded semi-annually, not quotes. For the Bank of Canada's explainer, see what's behind your mortgage rate.