When the Bank of Canada lowers its key interest rate, many expect mortgage rates to follow suit. However, while variable mortgage rates tend to decline, fixed mortgage rates can sometimes rise instead. This paradox has left many Canadian homeowners and potential buyers scratching their heads. Let’s dive into why this happens.
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Bank of Canada’s Latest Rate Cut and Its Impact
On Wednesday, Canada’s six major banks announced a reduction in their prime lending rates, lowering them from 5.45% to 5.2%. This decision followed the Bank of Canada’s sixth consecutive rate cut since June, bringing its key interest rate down to 3%. The move was aimed at keeping inflation near the 2% target while fostering economic growth.
Experts anticipated that this shift would make borrowing more affordable, particularly for those with variable-rate mortgages. However, fixed mortgage rates haven’t seen the same level of decline, leaving many wondering why they aren’t benefiting as much from the lower lending rates.
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Why Are Variable Mortgage Rates Decreasing?
According to Ratehub.ca mortgage expert Penelope Graham, the central bank’s decision should lead to lower variable mortgage rates across most Canadian lenders. Variable-rate mortgages are directly tied to the prime rate, meaning that when the prime rate drops, so do variable mortgage rates.
Ratehub’s calculations suggest that a homeowner who made a 10% down payment on an average-priced home in Canada—approximately $676,640 as of December 2024—would save around $87 per month with a five-year variable mortgage rate.
For every quarter-percentage-point rate cut, a homeowner with a variable-rate mortgage could expect to pay roughly $15 less per month for every $100,000 of mortgage, according to Victor Tran, a mortgage and real estate specialist at Ratesdotca.
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Why Are Fixed Mortgage Rates Not Following Suit?
While variable mortgage rates directly respond to central bank rate cuts, fixed mortgage rates are influenced more by bond yields. Shortly after the Bank of Canada’s announcement, bond yields fell to around 2.8%, which suggests a slight decrease in fixed mortgage rates. However, significant concerns over inflation among investors have prevented these rates from falling dramatically.
Graham emphasized that while bond yields are down, investor fears of inflationary pressures could keep fixed mortgage rates from dropping as much as expected. This means homeowners opting for fixed rates may not see the same level of savings as those with variable rates.
How Much Are Homeowners Saving?
Ratehub estimates that a homeowner with a five-year variable rate mortgage at 4.45%, amortized over 25 years with monthly payments of $3,458, would now see their rate drop to 4.2%. This would lower monthly payments to $3,371, resulting in an annual savings of approximately $1,044.
Since borrowing costs peaked in August 2023, a homeowner who made a 10% down payment on an average-priced home would have seen their monthly mortgage payment decrease by $685. At the peak, the best five-year variable rate was 5.95%, equating to monthly payments of $3,842. With recent rate cuts, those payments have now fallen to $3,157 based on a variable rate of 3.95%.
What Does This Mean for the Housing Market?
Phil Soper, president and CEO of Royal LePage, noted that the Bank of Canada’s latest move could boost borrowing power for homebuyers, especially with the spring housing market on the horizon. Typically, demand surges during this period, and lower borrowing costs could encourage more activity in the real estate sector.
However, uncertainties remain. The potential introduction of significant U.S. tariffs could create economic instability, influencing the Bank of Canada’s future decisions and consumer confidence.
Final Thoughts: Should You Lock In a Fixed Rate or Go Variable?
With variable rates responding more directly to the Bank of Canada’s rate cuts, homeowners looking for immediate savings might find them more appealing. However, for those concerned about long-term stability, fixed rates—though not dropping significantly—may still offer security against potential future rate hikes.
Ultimately, the best mortgage decision depends on individual financial situations and risk tolerance. Homebuyers and homeowners should consult mortgage professionals to determine which option aligns best with their goals.
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