Mortgage Basics

History of Mortgage Rates in Canada

History of Mortgage Rates in Canada
Written by
  • Ashley Howard
| 8 May 2024
Reviewed, 8 May 2024

Table of contents

    For many Canadians, purchasing a home is a considerable financial investment that can take years to save up for. The Bank of Canada’s (BoC) prime rate plays a significant role in determining mortgage rates in the country, ultimately affecting the interest rates that lenders offer to borrowers.

    By analyzing how the prime rate has trended in the past, you can better understand the patterns that interest rates have followed over time and anticipate upcoming fluctuations. This post focuses on the history of interest rates in Canada, examining the evolution of the prime rate and its impact on the real estate market.

    Key Takeaways

    • Established in 1996, the Bank of Canada implemented the overnight rate, which directly impacts the prime mortgage rate offered by banks and lenders.
    • During the global oil crisis in 1981, the Bank of Canada rate hit an all-time high of 20.03%.
    • Amid the COVID-19 pandemic, the Bank of Canada’s policy rate plummeted to 0.25%, marking a new record low.

    History of Mortgage Rates in Canada (1975 to 2024)

    Mortgage rates in Canada have a rich history that significantly impacts the expenses of owning a home, the housing market, and the overall economy. Despite various highs and lows over the years, mortgage rates in Canada have generally been decreasing since the 1970s. 

    Rates have dropped significantly from their peak in the 1980s when they reached high double digits due to high inflation and the global oil crisis. In 2020-2021, during the COVID-19 pandemic, they hit record lows and remained in the mid-single digits. Today, interest rates have climbed once again. However, they remain low compared to the double-digit rates many grew accustomed to in the 80s. 

    The prime rate was first established in 1935. It serves as the standard for all adjustable mortgages and financial products in Canada. Examining past trends in the prime rate will show numerous spikes and declines over the years, creating a pattern of interest rate fluctuation throughout the decades. Today, the prime rate is reaching another peak, indicating that rates will likely fall again.

    Who Determines Mortgage Rates in Canada?

    Since its establishment in 1935, the Bank of Canada (BoC) has played a crucial role in determining mortgage rates in Canada. The implementation of the target for the overnight rate in 1996, also referred to as the policy interest rate, has had a major impact on how lenders determine their prime rates.

    Lenders will adjust their prime rates in accordance with changes made by the Bank of Canada to its policy interest rate. If the policy rate increases, lenders will also increase their prime rates, while if it decreases, lenders will lower their prime rates.

    The prime rate is the benchmark for all a lender’s variable products. If you have a variable-rate mortgage, the prime rate’s increasing or decreasing impact will affect your mortgage. 

    The Significance of Historical Mortgage Rates

    Past mortgage rates and how they have fluctuated can help borrowers anticipate future changes to interest rates. Mortgage rates greatly impact the cost of owning a home. By examining past rates and trends, we can gain insights into the current rate landscape and anticipate how future changes may impact borrowing expenses in the coming years.

    The Consumer Price Index (CPI) includes shelter costs, with owned accommodations accounting for a substantial percentage (17.96%) of the total basket weight (28.34%), making changes to mortgage interest rates a leading driver of inflation. During this current cycle of tightening monetary policy by the Bank of Canada, the high inflation rate in Canada has been primarily attributed to shelter costs, which have hindered the possibility of rate cuts by the Bank. Therefore, the Bank must maintain the policy rate to regulate inflation and bring it back within the desired target range of 2%.

    Historical 5-Year Mortgage Rates 

    The 5-year fixed-rate mortgage plays a significant role as an economic indicator, as 5-year government bond yields influence it. Bond yields are commonly utilized to assess the current state of the economy. 

    5-year fixed rates have historically been the most popular choice in Canada. The pandemic marked a change in the mortgage market. Interest rates reached record lows, shifting from 5-year fixed to variable rates. For the first time, variable rates became the preferred choice by Canadians. 

    As interest rates have climbed, borrowers have opted for shorter-term fixed-rate mortgages. As many Canadians wait for interest rates to come down, this provides security through a locked-in rate while allowing them to secure a lower rate when it comes time to renew in a few years.

    Historical 3-Year Mortgage Rates 

    The 3-year fixed rate has experienced changes similar to the Bank of Canada’s Prime Rate over time. Due to its shorter term, financial institutions and lenders usually advertise 3-year fixed rates higher than 5-year rates. It’s recommended that those looking at 3-year terms also explore variable and adjustable-rate mortgages, depending on their financial situation and risk tolerance. 

    In the current high interest climate, 3-year fixed-rate mortgages have become increasingly popular to withstand high interest rates while homeowners wait for a decrease in rates. This type of mortgage has historically been favoured during times of high interest, such as the present.

    Monthly Mortgage Payments Throughout History

    Throughout the years, mortgage payments have varied dramatically due to shifts in the housing market and the economy. With high interest rates, mortgage payments tend to be much higher, causing financial strain for many homeowners. It should be noted, though, that when interest rates reached double digits in the past, the average cost of a home in Canada compared to household incomes was much more manageable than it is currently.

    The average monthly mortgage payment for an average-priced home in 1980 was $725, equivalent to approximately $2,720 today after adjusting for inflation. However, it is important to note that the average price of a home in 1980, when adjusted for inflation, would only amount to approximately $283,941 in today’s currency. This is approximately 2.5x lower than the average cost of a Canadian home today. 

    Comparison of Monthly Mortgage Payments and Monthly Household Income

    Compared to the 1980s, mortgage affordability has declined when comparing the percentage of a household’s monthly income dedicated to mortgage payments. A single salary used to easily cover the average monthly mortgage payment, coming in at just 27% of a typical Canadian’s single salary income. 

    However, starting in 2015 and continuing through today, a single salary for the average Canadian is no longer sufficient to cover the average monthly mortgage payment. Currently, only approximately 3% of the population make enough on a single salary that would allow them to purchase an average-priced home today. 

    Historical Moments That Defined Mortgage Rates

    These significant events in Canada’s economic history impacted the Bank of Canada’s rate and the housing market.

    Post WWII: Housing Demand of the Baby Boomer Generation

    During WWII, Canada played a crucial role in providing natural and manufactured resources, resulting in a strengthened economy after the war. The employment rate was high, with women participating in the workforce, leading to increased purchasing power. The demand for goods and services was also high, and with the Bank of Canada’s interest rate dropping to 2.0%, more Canadians could invest in housing.

    1970s and 1980s: Inflation and Stabilization

    During this time, the global oil crisis and the OPEC oil embargo greatly impacted the Bank of Canada’s prime rate. In the late 1970s, the prime rate surpassed double digits (10.25%) for the first time and continued to rise significantly throughout the 1980s, eventually reaching an unprecedented 20.03%. 

    1990s: Economic Recession and Recovery Period

    The inflation-target rate was implemented in 1991 following the oil crisis. The decade after the 1980s recession saw the Canadian economy bounce back, and the Bank of Canada decreased rates. 

    2000s: The Global Financial Crisis

    The Bank of Canada rate was heavily affected by the financial crisis and recession of 2008. This crisis caused the rate to drop below 1%, reaching its lowest point of 0.50% in March 2009.

    2010 – 2019: Digital Revolution and Modern Challenges.

    At the beginning of the 2010s, Canada’s economy showed signs of improvement and was beginning to recover. However, this was short-lived, followed by another recession due to decreased oil prices. As a result, the rate fell below 1%, reaching a low of 0.75%.

    Economic growth increased noticeably in the late 2010s (2018-2019); however, the Bank of Canada maintained a low rate of 1.75% due to consistent low inflation. 

    2020 – 2024: Impact of COVID and Inflation

    In March 2020, the Bank of Canada saw the economy decline due to the COVID-19 pandemic, leading to a decrease in interest rates below 1% and nearing its minimum limit of 0.25%. This low rate persisted throughout 2020 and 2021 due to decreased consumer spending.

    The end of the pandemic resulted in a rise in inflation due to the global economy and the halt of supply chains. The beginning of the Bank of Canada’s efforts to control what they believed to be temporary inflation was marked by an increase in rates in March 2022. This pattern of increasing interest rates continued into 2023. The policy rate remains at a 23-year high as the BoC maintains its stance on managing inflation to bring it back to the 2% target.

    Frequently Asked Questions

    Where will mortgage rates head in the future?

    Historically, mortgage rates have been much higher than where they are today. However, it appears we have reached the peak of this cycle and should see rates head down. With inflation still higher than the 2% target, the policy rate is expected to be maintained, with some predictions indicating we could see some slight decreases in rates this year.

    Are mortgage rates high today?

    Current rates may seem high compared to the past few years, especially with the lows experienced during the pandemic. However, based on historical rates, today’s rates are relatively in line with what would be considered average.

    What were the highest rates in Canada?

    The highest mortgage rates were seen during the global oil crisis in the 1980s. During this time, mortgage rates skyrocketed, reaching high double digits. The Bank of Canada’s prime rate reached 20.03%.

    Final Thoughts 

    Understanding past mortgage rates and trends in Canada can give buyers insights into the current market and what may follow in the future. The influence of the Bank of Canada’s Prime Rate on mortgage costs and homeownership can significantly impact your budget and purchasing power. 

    If you’re a prospective buyer, these insights can help you devise a strategic approach towards purchasing a home. Contact us today and make your homeownership dreams a reality.