Glossary
Policy Interest Rate
The Bank of Canada's target for the overnight rate, which anchors short-term borrowing costs and influences Canadian mortgage pricing..
The Policy Interest Rate is the Bank of Canada's target for the overnight rate — the rate at which large financial institutions lend funds to one another for a single day. The Bank sets that target and uses its monetary policy tools to keep the actual overnight rate close to it, which in turn influences the prime rate and the mortgage rates Canadians are offered.
How the policy rate reaches your mortgage
The Bank of Canada's Governing Council reviews the target on scheduled announcement dates and can raise it, lower it, or hold it. Canada's chartered banks typically adjust their prime rate in step, because prime is closely tied to short-term funding costs. A variable-rate mortgage is usually quoted as prime plus or minus a spread, so a change in prime moves that contract. Fixed-rate mortgages are priced differently, mainly off Government of Canada bond yields, which respond to expectations about where the policy rate is heading rather than only to its current setting.
- Fixed-rate mortgages: tied mainly to bond yields and to expectations about future policy rate decisions.
- Variable-rate mortgages: tied to prime, which follows the policy rate quickly.
- Home equity lines of credit: usually prime-based as well.
Why it matters to borrowers
The policy rate shapes both what you pay and what you can qualify for. Through the federal mortgage stress test, federally regulated lenders must qualify borrowers at a rate above the contract rate — typically the greater of the contract rate plus a buffer, or a set floor. Confirm the current figures with OSFI or your lender.
Consider a variable-rate mortgage quoted at prime minus a discount. If the Bank lowers its target and the bank lowers prime by the same amount, the interest portion of each payment falls. If the Bank raises the target, the reverse happens and more of each payment goes to interest.
Watching the rate, not predicting it
The policy rate is published and reviewed on a fixed calendar, so borrowers can follow announcements rather than guess. Rate holds and rate locks offered by lenders are separate commitments and are not set by the Bank of Canada. Anyone comparing offers should weigh the full picture — the contract rate, the mortgage term, prepayment terms, and how interest is compounded — using the guide to the Bank of Canada policy rate and mortgages.
Frequently asked questions
Does the Bank of Canada policy rate directly set my mortgage rate?
No. The policy rate is a target for the overnight rate between financial institutions, not a consumer rate. It influences the prime rate, and prime in turn anchors variable-rate mortgages and lines of credit. Fixed-rate mortgages track Government of Canada bond yields more closely, and those move on expectations about future policy rate decisions. Your lender sets your actual contract rate.
How quickly does a policy rate change affect my mortgage payment?
For an adjustable-rate variable mortgage, payments can change shortly after prime moves, often at the next scheduled payment date. For a static-rate variable mortgage, the payment usually stays the same but more of it goes to interest, which can stretch the amortization. Fixed-rate borrowers are unaffected until renewal. Confirm the timing with your lender.
What is the difference between the policy rate and the prime rate?
The policy rate is the Bank of Canada's target for the overnight rate, set as part of monetary policy. The prime rate is a commercial lending rate set by individual banks, and it typically moves in step with the policy rate. Mortgage contracts usually quote variable rates as prime plus or minus a spread, so prime is the figure that appears in your paperwork.
Sources
Related terms
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.
- Variable-Rate Mortgage — A mortgage whose interest rate rises and falls with the lender's prime rate during the term instead of staying fixed.
- Mortgage Stress Test — The federal mortgage stress test is a qualification rule that makes lenders check whether you could afford your mortgage if rates were higher than your contract rate.
- Fixed-Rate Mortgage — A fixed-rate mortgage keeps the same interest rate and the same scheduled payment for the entire mortgage term, so each payment is known in advance.
- Adjustable-Rate Variable Mortgage — An adjustable-rate variable mortgage ties the interest rate to a lender's prime rate, so the periodic payment rises or falls as prime moves.