Definition
The overnight rate (also called the target for the overnight rate or policy rate) is the interest rate at which major Canadian banks lend money to each other overnight. The Bank of Canada sets it at 8 annual meetings (pre-announced dates).
Its impact on mortgages operates at two levels:
1. **Variable mortgages**: bank prime rates are directly linked to the overnight rate — typically prime = overnight rate + 2.20%. When the Bank of Canada raises its rate by 0.25%, prime rises by 0.25%, and variable mortgage payments increase almost immediately. 2. **Fixed mortgages**: less directly linked to the overnight rate, they follow Government of Canada bond yields (5-year), which themselves anticipate medium-term economic prospects.
The 2022–2023 rate hike cycle (overnight rate from 0.25% to 5.00% in 17 months) illustrated the violent impact on variable-rate mortgage holders with fixed payments.