The Rate Chain: From Ottawa to Your Mortgage
The Bank of Canada (BoC) sets the overnight rate — the interest rate at which major financial institutions borrow and lend one-day funds to each other. This single number is the starting point for almost every interest rate in the Canadian economy.
When the BoC changes the overnight rate, banks adjust their prime rate almost immediately. The prime rate is typically set at the overnight rate plus 2.20%. With the current overnight rate at 2.25%, the prime rate at most major banks sits at 4.45%.
Variable-rate mortgages are priced relative to prime. A variable rate quoted as “prime minus 1.10%” means your actual rate is 3.35% (4.45% minus 1.10%). When the BoC cuts or raises the overnight rate, your variable rate moves in lockstep.
Variable Rate vs Fixed Rate: Different Drivers
One of the most common misconceptions is that the Bank of Canada rate drives all mortgage rates. In reality, only variable rates follow the overnight rate directly. Fixed rates are driven by a completely different mechanism.
Variable rates follow the overnight rate
When the BoC cuts the overnight rate by 0.25%, banks lower prime by 0.25%, and your variable mortgage rate drops by 0.25%. The adjustment is immediate and dollar-for-dollar. This is why variable-rate borrowers pay close attention to BoC announcements.
Fixed rates follow bond yields
Fixed mortgage rates are priced off Government of Canada bond yields — primarily the 5-year bond for 5-year fixed mortgages. Bond yields are set by the market (not the BoC) and reflect investor expectations about future inflation and economic growth. Fixed rates can move independently of the overnight rate.
The disconnect can be dramatic
In late 2024 and 2025, the BoC cut the overnight rate significantly, but fixed rates barely moved because bond yields remained elevated due to global inflation concerns and government borrowing. This meant variable rates dropped while fixed rates stayed relatively flat.
Where Rates Stand in 2026
After seven consecutive rate cuts from a peak of 5.00%, the Bank of Canada has brought the overnight rate to 2.25%. The BoC has signalled a data-dependent approach going forward, meaning further cuts depend on inflation staying near the 2% target.
Current Rate Snapshot — April 2026
| Rate | Current Level | Impact |
|---|---|---|
| BoC Overnight Rate | 2.25% | Drives variable rates |
| Bank Prime Rate | 4.45% | Variable mortgage base |
| Best 5-Year Variable | 3.35% | Prime minus 1.10% |
| GoC 5-Year Bond Yield | ~2.9% | Drives fixed rates |
| Best 5-Year Fixed | 3.94% | Bond yield + lender spread |
For a deeper comparison of fixed vs variable rates, including historical performance data, see our fixed vs variable analysis.
How Rate Changes Affect Your Payment
The impact of a 0.25% rate change depends on your mortgage balance and whether you have a fixed or variable rate mortgage:
- On a $400,000 variable-rate mortgage, a 0.25% cut saves approximately $56 per month or $672 per year.
- On a $600,000 variable-rate mortgage, the same cut saves approximately $84 per month or $1,008 per year.
- Fixed-rate mortgages are unaffected by BoC decisions during their term. Your rate and payment remain locked until renewal.
- At renewal, fixed-rate borrowers face the current market rate, which may be significantly different from what they were paying.
What to Expect for the Rest of 2026
The consensus among market economists as of spring 2026 is cautious. After the aggressive cutting cycle of 2024-2025, the BoC appears to be in a holding pattern. Key factors to watch:
- Inflation: Core inflation remains near the 2% target. If it stays there, there is room for one more cut. If it drifts higher, the BoC will hold.
- Employment: The labour market has softened modestly. A significant weakening could prompt additional cuts to support the economy.
- Housing prices: Strong housing demand, particularly in BC and Ontario, gives the BoC reason to be cautious about further rate cuts that could overheat the market.
- Global trade: Trade policy uncertainty and tariff developments add economic risk that could push the BoC toward either direction.
Markets are currently pricing in one additional 25-basis-point cut by mid-2026, which would bring the overnight rate to 2.00% and prime to 4.20%. However, this is far from certain and depends entirely on incoming economic data.
Practical Guidance for Mortgage Shoppers
Given the current rate environment, here is how to think about your options:
If you are buying a home
Both fixed and variable rates are at attractive levels by historical standards. The choice depends on your risk tolerance. Variable offers a lower starting rate and benefits if the BoC cuts further, but fixed offers certainty. Use our comparison tool to see both scenarios for your situation.
If your mortgage is renewing
Do not simply sign your lender's renewal offer. The spread between the posted renewal rate and the best available rate can be 50 to 100 basis points or more. Shopping your renewal — or having a broker do it — can save thousands over your next term.
If you are considering breaking your mortgage
With rates having dropped significantly from 2023-2024 levels, the savings from a lower rate may justify the penalty of breaking early. Use our penalty calculator to run the numbers before making a decision.
Compare Rates in Today's Market
See how today's Bank of Canada rate translates into your actual mortgage payment. Compare fixed and variable options side by side.
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