Fixed mortgage rates are going down in Canada. Should we expect the same from variable rates?

Variable mortgage rates keep growing in Canada. At the same time, fixed mortgage rates have been showing quite an opposite tendency.

Starting this month, some lenders and national brokerages have been reducing their rates for certain fixed-rate loans.

As a result, an average deep-discount 5-year fixed mortgage rate is now almost 0.20% lower than at the beginning of January. Such a change was caused by a drop in the 5-year Government of Canada bond yield, which usually affects fixed mortgage rates directly.

On Monday, the 5-year bond yield reached 3.05%, rising slightly from a 5-month low level of 2.80% seen last week. Nevertheless, the yields are still below 3.40% reported four weeks ago and the 14-year high of 3.89% seen in October.

Although it’s not the first drop in fixed mortgage rates, some believe that with the coming recession and the fact that the worst numbers of inflation may be over, interest rates will keep declining.

“It sure seems that we’re beginning to face certain resistance on fixed mortgage rates,” – Ben Rabidoux of Edge Realty Analytics noted. “In my opinion, it’s quite possible that fixed mortgage rates have already reached their peak and now they are starting to go down”.

According to him, the fact that fixed rates are almost 1.20% lower now than the variable ones means that the market is expecting the central bank to reduce the rate later this year,” – he said. “Fixed rates are lower now than the variable ones because they are affected by the bond market, and it’s been obviously signalling that the worst of the inflation numbers is already over.”

In case this tendency goes on, Rabidoux says there’s a strong possibility that 5-year fixed rates will fall by the spring active season.

Many borrowers are definitely expecting lower rates in the nearest future, and that explains the growing popularity of short-term fixed mortgage rates.

Based on data from the central bank, we can see that borrowers are switching from variable rates to fixed ones more often these days, with 31% of all new mortgages in November having a fixed-rate term of three years or even less.