The history of interest rates in Canada

With the Bank of Canada aggressively raising rates in 2022 and 2023, mortgage holders are feeling the heat. Despite what might currently seem like a volatile time in the mortgage market, the history of mortgage and interest rates in Canada has seen worse.

Let’s take a dive into the history of mortgage rates in Canada, going back to the inception of the bank rate set by the Bank of Canada in 1935.

History of the Bank of Canada

The Bank of Canada was founded in 1935 and from 1935 to 1956 the bank rate was a fixed rate set by the central bank. Beginning in 1935 the overnight rate was 2.50% and the prime rate set by banks was 5.50%.

What is the overnight rate?

The overnight rate, more commonly referred to as the Bank of Canada’s policy interest rate or the key rate, is the cheapest interest rate at which other financial institutions can borrow money from the central bank which issues new currency. As a result all other interest rates, including the ones available to consumers for example via a mortgage, are tied to this rate. Banks and other financial institutions will always charge a premium (or provide a discount when offering interest like in a savings account) on the overnight rate so that they turn a profit. The term overnight rate refers to Banks borrowing money from the central bank on a one day basis.

What is the prime rate?

The prime rate is a rate set by banks tied to the policy interest rate that banks use to anchor their financial products to. Variable mortgage rates, for example, are offered in the form of prime plus or minus a certain amount. The prime rate is always higher than the overnight rate, usually by a couple percent.

History of interest rates 1956 to 1962

In November 1956 the Bank of Canada switched from deciding a fixed policy interest rate, to a floating key interest rate which was tied to the 3-month treasury bill. This resulted in a key interest rate that fluctuated on as short as a weekly basis. In 1956 the bank rate fluctuated around 3.15% and in 1962 it was 4.48%.

The Bank of Canada returns to a fixed interest rate in 1962

In June 1962 the Bank of Canada set a fixed policy interest rate again and did so until 1980. During this time interest rates fluctuated between a low of 3.88% to a high of 12.89% in 1980 during the recession of the early 1980’s. In 1975, 5-year fixed mortgage rates were sitting around 11.38% and by 1980 they had climbed to 14.2%

The highest mortgage rates have ever been 1980-1996

In 1980, the Bank of Canada again switched to a floating interest rate held at 0.25% above the current 3-month treasury bill yield. In the early 1980’s Canada faced a period of high inflation and a deep economic recession. This caused interest rates to reach levels never before or since seen. In 1981 the overnight rate peaked at 17.93%. In September of 1981 conventional mortgage rates were just over 21%. The rate of inflation itself peaked earlier in 1981 at 12.9%.

History of the Bank of Canada 1996-present

In 1996 the Bank of Canada once again returned to a fixed policy interest rate determined at regularly scheduled interest rate meetings held throughout the year. The Bank of Canada has a stated goal “to promote the economic and financial welfare of Canada” through monetary policy, striving to keep inflation at a target of 2% while encouraging the economy to grow.

Since 1990 the key interest rate has averaged around 5.78% with it currently sitting at 5.00%. Mortgage rates generally trend a few percentage points higher than the key rate, and today the best fixed rate offered by our lenders is 5.64%

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