Canadian interest rates are falling, so why aren’t fixed mortgage rates falling as fast?

Many Canadian borrowers are relieved that the Bank of Canada is continuing the cycle of rate cuts it began in mid-2024. Those with variable rate mortgages have been particularly relieved. However, fixed mortgage rates haven’t fallen at the same pace, leaving some potential homebuyers and existing homeowners wondering why.

Unlike variable rates, which typically track the central bank’s interest rate, fixed rates are based on government bond yields, which reflect economic forecasts and investor sentiment, says Daniel Retasi, senior vice-president of personal lending at CIBC.

“If the Bank of Canada’s rate moves are in line with market expectations, fixed mortgage rates are unlikely to move immediately with the central bank’s rate moves,” he says.

“Fixed rates behave a lot like stock prices. The price of a stock already has the expected future performance of a company priced into it. And just as a stock price reflects the expected future performance of a company, fixed mortgage rates follow where the economy and borrowing costs are expected to go,” Retasi adds, which is why fixed mortgage rates may not change, or not immediately, when the Bank of Canada changes its overnight rate.

In other words: When comparing five-year fixed and floating mortgage rates, the fixed rate is the best “crowdsourced” guess of what the average floating mortgage rate will be over those five years, Retasi says.

It’s important to note that predicting rates even one year out is nearly impossible today, let alone five years out.

Fixed mortgage rates began to decline in early 2024, well before the Bank of Canada began cutting its key rate. This is because the market was confident that rate cuts were coming.

In an uncertain environment, many homeowners are having a hard time deciding between a fixed or variable rate mortgage. The best way to do this is to seek advice from an experienced mortgage broker and base your decision on the interest rate outlook and your long-term financial goals.

Homeowners should also be realistic about their tolerance for rate risk. For example, choosing a variable rate mortgage means your interest rate and payment amount will change with each rate cut from the Bank of Canada. While the central bank is expected to cut rates at least twice more in 2025, any future increases could result in you paying more over the life of your mortgage (a typical term in Canada is five years). Meanwhile, a fixed rate mortgage, for example, for the next five years, protects you from rate increases, but you won’t benefit from future rate cuts from the Bank of Canada.