The key interest rate in Canada is 2.25%, the rate banks pay to borrow overnight from the central bank. That policy rate influences Canada’s prime interest rate and variable mortgage interest rates in Canada. Fixed mortgage rates follow a separate channel tied to government bond yields.
Central bank interest rate decisions and the 2.25% level
The central bank sets its policy interest rate eight times a year. Its Governing Council examines inflation data and releases from the national statistics agency before deciding to hike, hold, or cut. The current 2.25% rate sits below the 1960–2017 private-sector lending average of 7.37%. Canada’s rate peaked at 16.00% in February 1991 and hit a low of 0.25% in July 2021. A 2.25% policy rate means short-term borrowing is cheaper than the long-run average but not as cheap as the pandemic-era floor.
How the key interest rate moves Canada’s prime interest rate
The policy rate influences lenders’ prime benchmarks, which in turn affect variable mortgages. Variable mortgage rates are quoted as the prime rate minus a discount. In March 2026, floating mortgage rates sat in the 3.5% to 4.0% range as banks trimmed discounts, while fixed rates rose on bond yields and geopolitical instability. The gap between fixed and floating rates narrowed.
Fixed and variable mortgage interest rates in Canada
A fixed mortgage interest rate in Canada moves with government bond yields, not the eight scheduled central bank decisions. When investors require higher yields on five-year bonds, fixed mortgage pricing increases even if the key rate holds at 2.25%. The central bank’s overnight rate still matters for variable contracts, home equity lines of credit, and Canada’s prime interest rate. Borrowers should compare a variable rate of 3.5% to 4.0% against fixed rates rather than assume the 2.25% overnight rate makes every mortgage cheap.
Down payment and debt service rules
Canadian mortgage qualification uses two limits. Gross Debt Service cannot exceed 32% of gross income, and Total Debt Service cannot exceed 40%. The minimum down payment depends on purchase price:
| Mortgage scenario | Down payment or insurance requirement |
|---|---|
| Purchase under $500,000 | 5% down payment |
| Purchase from $500,000 to $999,999 | 5% on the first $500,000 plus 10% on the remainder |
| Purchase of $1,000,000 or more | 20% down payment |
| Less than 20% down | Mortgage default insurance at 0.6% to 4.5% |
A $700,000 purchase requires $25,000 on the first $500,000 and $20,000 on the remaining $200,000, for a $45,000 down payment. Down payment funds must be the borrower’s own funds saved for at least 90 days. Canada’s 2026 federal tax brackets start at 14% and top out at 33%, with a basic personal amount of $16,452. Marginal tax rates apply only to income within the relevant bracket.
What a 2.25% policy rate means for borrowers
A key interest rate of 2.25% gives variable-rate borrowers a lower base cost than the 7.37% private-sector lending average recorded from 1960 to 2017. Fixed-rate borrowers face a different risk: bond yields and geopolitical shocks can lift fixed mortgage rates even without a central bank hike. Borrowers should run the GDS and TDS math at the current contract rate, then compare the variable quote of 3.5% to 4.0% against the posted fixed rate. Do not base the mortgage decision on the 2.25% overnight rate alone.
Merchant card fees are a separate cash flow item
The central bank policy rate does not control merchant credit card costs. Canadian merchants pay 2.4% to 2.9% for in-person card transactions plus a fixed fee. Hidden subscription and PCI fees can push the effective rate 30% to 60% higher.
