Glossary
Floor Rate
A floor rate is the minimum interest rate that can apply to a variable-rate mortgage, below which the borrower's rate will not fall..
Floor rate is the lowest interest rate that can apply to a variable-rate mortgage, set out in the mortgage contract as a level below which the borrower's rate will not fall, even if the lender's prime rate or the underlying benchmark keeps declining.
How a floor rate works in Canada
Most variable-rate mortgages in Canada are priced as a discount or premium to prime rate, and prime rate generally moves with the Bank of Canada's policy interest rate. When the policy rate falls, prime tends to fall, and the contract rate normally follows. A floor rate interrupts that link. Once the contract rate reaches the floor, further drops in prime no longer reduce what the borrower pays.
Lenders express the floor in different ways. Some contracts name a specific percentage. Others describe it as the deepest discount the lender will honour below prime, or as a minimum spread. Not every variable-rate product includes one, and terms differ by lender, so the floor — if any — should be confirmed in the commitment letter and disclosure documents before signing.
Why the floor rate matters to borrowers
- On an adjustable-rate variable mortgage, the payment rises and falls with the rate. At the floor, payments stop falling even if prime keeps dropping.
- On a static-rate variable mortgage, the payment stays fixed while rate changes shift how much of each payment goes to interest versus principal. A floor limits the extra principal reduction a borrower would otherwise receive.
- On qualification, some lenders consider the floor when assessing affordability, so a higher floor can reduce the mortgage amount a borrower may be offered.
In short, a floor protects the lender's margin on the way down and does not protect the borrower. An interest rate cap works the opposite way, limiting how high the rate can climb.
What to check in your mortgage documents
Ask whether the product carries a floor, how it is expressed, and whether it applies only to the interest rate or also to any discount below prime. Confirm how your lender qualifies variable-rate borrowers, since the floor may be used instead of the current contract rate. Because the Bank of Canada's policy rate drives prime, its announcements are worth following — see our guide on the policy rate and your mortgage.
Frequently asked questions
Does every variable-rate mortgage in Canada have a floor rate?
No. Many variable-rate mortgages let the rate follow prime rate without a stated minimum, while others include a floor in the contract. Whether one applies depends on the lender and the specific product. Because terms differ, borrowers should ask the lender directly and read the commitment letter and disclosure documents before signing.
Can my mortgage rate go below the floor if the Bank of Canada cuts rates?
No. The floor rate is the contractual minimum. If the Bank of Canada lowers its policy rate and prime rate falls with it, your rate will drop only until it reaches the floor. Below that level, your rate stays put even if prime continues to fall, and the lender keeps the difference.
Does a floor rate affect how much I can qualify for?
It can. Some lenders assess variable-rate borrowers using the floor rate rather than the current contract rate, which can lower the mortgage amount offered. Qualification also depends on the federal mortgage stress test and the lender's own underwriting. Confirm how your lender treats the floor before relying on a pre-approval figure.
Sources
Related terms
- Variable-Rate Mortgage — A mortgage whose interest rate rises and falls with the lender's prime rate during the term instead of staying fixed.
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.
- Adjustable-Rate Variable Mortgage — An adjustable-rate variable mortgage ties the interest rate to a lender's prime rate, so the periodic payment rises or falls as prime moves.
- Interest Rate Cap — An interest rate cap is a contractual limit on how high a variable mortgage rate can rise over a set period.
- Static-Rate Variable Mortgage — A variable-rate mortgage whose payment stays fixed while the interest and principal split shifts as the lender's prime rate moves.