Why Fixed Mortgage Rates May Stay Stubborn Even After BoC Cuts!

The recent interest rate cut from the Bank of Canada has sent waves through the financial waters, but don’t expect a quick splash of relief for those diving into the fixed-mortgage market anytime soon, experts caution.

Just last Wednesday, the central bank made headlines by slashing its policy rate for the second consecutive time, dropping it by a hefty half-point. With 2024 seeing five cuts in total, the key rate now sits at an enticing 3.25 percent.

However, before you get your hopes up, BMO’s senior economist Robert Kavcic warns that the fixed mortgage rates in Canada may have already hit their rock bottom, despite the significant decrease in borrowing costs linked to the central bank’s benchmark.

Canadians holding variable-rate debts—think some mortgages and home-equity lines of credit—have already started to enjoy the benefits of this 50-basis-point drop. But for those eyeing fixed-rate mortgages, the same relief is unlikely to materialize.

Why the discrepancy? Fixed-rate mortgages don’t directly react to the Bank of Canada’s policy rate; they’re influenced indirectly through the ever-shifting bond yields that lenders use to price these mortgage products.

As we look towards 2025, with the Bank hinting at a slower pace of easing, Kavcic noted that the five-year Government of Canada bond yield—a crucial factor for popular five-year fixed-rate mortgages—actually ticked upward on Wednesday.

While economists predict further interest rate cuts in the coming year, markets have already baked in another 50-basis-point reduction by June. However, unless expectations for the Bank change dramatically, Kavcic suggests there may not be much room left for five-year yields to fall.

In essence, we might already be staring at the lowest mortgage rates we’ll see in a stable economy, Kavcic remarks.

Mortgage and real estate expert Victor Tran emphasizes that both bond yields and fixed-mortgage rates have been “pretty stubborn” over the past few months, fluctuating only slightly within the low-to-mid-four percent range.

As we approach 2025, there’s potential for homebuyers and those renewing mortgages to see rates dip into the high-three percent range, but lenders are proceeding with caution, Tran warns.

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In a world of trade uncertainty, the Bank of Canada is keeping a watchful eye on developments across the border, especially with rising tensions surrounding potential tariffs from the U.S. administration.

Experts have warned that if these tariffs materialize, Canada’s economy could take a significant hit, prompting the central bank to consider sharper rate cuts to cushion the blow.

Tran points out that lenders are hesitant to make drastic adjustments to their fixed-rate mortgage offerings, especially with the potential for shifting economic conditions that could force the bank’s rate path downward.

Nevertheless, as the Bank of Canada trends lower with its policy rate, both Kavcic and Tran have noted that the gap between fixed and variable mortgage rates is shrinking in the market, bringing new dynamics for prospective homebuyers.

Variable mortgages, which had previously been priced higher than fixed options during the central bank’s tightening phase, have moved closer to fixed-rate mortgages recently.

This shift has made it trickier for those looking to enter the housing market or refinance in early 2025, as the options are now more competitive, leaving many weighing the benefits of locking in fixed stability against the chances of variable rates dropping further.

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