When it comes to purchasing a home, your mortgage rate can make a significant difference in your monthly payments and the total cost of your loan. Yet, many buyers don’t fully understand what influences this crucial number. Canadian mortgage expert Stacey Soans shares her insights into the many factors that affect mortgage rates—and how homebuyers can position themselves to get the best possible deal.
Credit Score: A Reflection of Financial Trustworthiness
Your credit score is one of the first things lenders examine. In Canada, credit scores range from 300 to 900, and the higher your score, the more trustworthy you appear in the eyes of lenders. A strong credit score demonstrates that you’ve managed your debts responsibly, which typically leads to more favorable mortgage rates.
“Paying bills on time, keeping your credit card balances low, and avoiding new debt before applying can have a huge impact on the rate you’re offered,” Stacey explains. Building or improving your credit score takes time, but the savings over the life of your mortgage can be substantial.
Fixed vs. Variable: Choosing the Right Mortgage Type
Another critical decision is whether to opt for a fixed-rate or variable-rate mortgage. A fixed-rate mortgage offers the security of knowing exactly what you’ll pay each month, regardless of market changes. On the other hand, variable-rate mortgages are tied to the lender’s prime rate and can fluctuate with the broader economic environment.
“There’s no one-size-fits-all answer,” Stacey says. “It depends on your financial goals, your tolerance for risk, and your expectations for where interest rates are headed.” In a rising rate environment, many buyers lean toward fixed rates for stability, while others might gamble on a variable rate if they anticipate future declines.
The Power of Your Down Payment
Your down payment not only affects your monthly payment and insurance costs but also your mortgage rate. In Canada, buyers need a minimum down payment of 5% for homes under $500,000. However, if you can contribute 20% or more, you may avoid mortgage default insurance and secure a better rate.
Lenders see larger down payments as a sign of financial strength. “Saving up more upfront can give you leverage,” says Stacey. “It shows commitment and reduces the lender’s risk, which can translate into more attractive terms.”
Mortgage Insurance and Its Surprising Influence
If your down payment is less than 20%, you’ll be required to purchase mortgage default insurance through providers like CMHC, Sagen, or Canada Guaranty. While this adds to your overall costs, it also reduces the lender’s risk, sometimes resulting in a slightly lower interest rate for insured mortgages.
However, Stacey cautions against assuming that a lower rate is always the better option. “You need to look at the big picture. Insurance premiums can add thousands to your loan. It’s important to weigh the pros and cons carefully.”
Debt Ratios and Income Stability
Lenders also consider your debt service ratios—metrics that assess how much of your income is going toward housing and other debts. These ratios help determine whether your income can support a mortgage.
“Even if you have a high income, significant existing debts can hurt your chances of getting a good rate,” Stacey says. Keeping your total debt load manageable and showing a stable employment history can strengthen your mortgage application.
The Property Itself Can Affect the Rate
Believe it or not, the property you buy also plays a role. Primary residences in major cities often come with lower rates compared to rental properties, rural homes, or vacation properties. Lenders assess risk based on the type, use, and location of the property.
Homes in sought-after neighborhoods with strong resale value tend to carry less risk, making them more attractive to lenders. Stacey recommends being mindful of this if you’re purchasing outside a major metropolitan area or considering an unconventional property type.
Amortization Period and Loan Amount
How long you plan to take to repay your mortgage—your amortization period—also impacts the interest rate. In Canada, the standard amortization is 25 years, but extending to 30 years (if you have a 20% or greater down payment) lowers monthly payments at the cost of paying more interest overall.
“Some lenders may charge a slightly higher rate for longer amortizations,” Stacey notes. “But it can be the right choice for those needing flexibility in their monthly budget.”
Similarly, the size of your mortgage matters. Larger loans may come with better rates due to economies of scale, but they also expose you to more interest risk over time. Understanding how your loan amount influences your rate can help you make a more informed borrowing decision.
The Economy’s Role in Rate Fluctuations
While personal finances matter greatly, so does the larger economic picture. The Bank of Canada’s overnight lending rate—used to control inflation and stabilize the economy—directly influences mortgage rates across the country. When inflation is high, the Bank may raise interest rates, making borrowing more expensive. Conversely, economic downturns often lead to lower rates to stimulate activity.
Keeping up with these trends can help you time your mortgage decisions. “Getting pre-approved when rates are low can protect you for up to 120 days,” Stacey explains. “It’s one of the smartest moves a buyer can make.”
Not All Lenders Are Created Equal
Many Canadians default to their existing bank for mortgage financing, but Stacey recommends exploring all options. From big banks and credit unions to monoline lenders and mortgage brokers, each institution has its own rates, terms, and approval criteria.
“Even a small difference in interest rate—say, 0.10%—can add up to thousands of dollars over time,” she says. Working with a mortgage broker can help you shop around and find the best fit for your situation, especially if your application is more complex.
Empowering Buyers with Knowledge
Understanding what affects your mortgage rate gives you a stronger position in one of life’s biggest financial decisions. With the guidance of experts like Stacey Soans, Canadian homebuyers can confidently navigate the process and make decisions that align with both their short- and long-term goals.
From managing your credit and saving for a larger down payment to choosing the right mortgage type and staying informed about economic shifts, each step you take can lead to better borrowing power and big savings. With the right strategy, your dream home doesn’t just become affordable—it becomes a smart investment in your financial future.