What contract rate means in Canadian mortgage lending and how it differs from the qualifying rate and posted rate.
The contract rate is the actual interest rate written into the mortgage agreement for the current term. It is the rate used to calculate the borrower’s contractual interest cost under that mortgage product.
Borrowers often see several rates at once: posted rate, discounted rate, qualifying rate, and the actual signed rate. The contract rate is the one that usually drives the real mortgage cost during the term.
In a fixed mortgage, the contract rate usually stays the same for the full term. In a variable mortgage, the contract may instead define the pricing formula, such as prime minus a spread, so the effective contract rate can move during the term.
The contract rate is also central to the mortgage stress test, because the qualifying rate is often based on the contract rate plus a buffer rather than on the contract rate alone.
A borrower might sign a mortgage at 4.79%. That 4.79% is the contract rate for the current fixed term, even if the lender’s posted rate is higher and the benchmark qualifying rate used for underwriting is higher still.
The contract rate is not always the same as the rate used to qualify. In Canada, borrowers are often underwritten at a higher test rate.
Borrowers also sometimes assume the contract rate is the only number worth comparing. In reality, penalty structure, prepayment rights, and registration type can matter just as much.
Variable-rate products, blended pricing, and promotional structures can make the contract-rate discussion more nuanced than a single fixed percentage suggests.