Cat, most of the loans do stay on the books of the chartered banks ( I think 70% is the round average). Mortgages sold off are almost always CMHC insured, this gives the investor the confidence that the mortgages are top quality. My understanding is that Canadian banks retain a higher percentage on book than many foreign banks.

Dealing with interest rates is a complex area. There are several synthetic instruments out there (interest rate swaps) that attempt to balance an investment portfolio over time. The end result is that you do not want to be adversely affected by sudden movements in interest rates either up or down. A relatively stable bottom line over time is the ideal.