When the prime rate drops, fixed rates won't budge.
And they've likely already hit bottom for a while. Here's why, and what it could mean for your home-buying plans.
Anyone in Ontario thinking about buying a home (or renewing a mortgage) gets excited when interest rates are dropping. And they wonder how much longer they should wait to save as much as possible on such a substantial purchase.
However, some home buyers who prefer fixed-rate mortgages may not realize that this rate type doesn't follow prime rates down after a Bank of Canada policy cut, as floating variable mortgage and line-of-credit rates do.
Fixed rates are like a done dog that's plopped down mid-walk — they're not budging.
Here's what does move fixed mortgage rates and how economic volatility can make them unpredictable as the prime rate drops.
Just so there's no confusion, your fixed rate is locked for your chosen term (e.g. 5 years) and won't budge until renewal — which means you watch prime rate drops from the sidelines.
Or you can break your mortgage to take advantage of a better rate, but it likely means incurring a potentially hefty pre-payment penalty. Sometimes, this scenario can make savings sense.
Canada's bond yields and fixed mortgage rates compete on similar terms (e.g. 5 years) to attract bank capital, with fixed mortgage rates typically set at a spread of about 1-2% above bond yield terms.
And what moves bond yields and, conversely, fixed rates? The bond yield market is much bigger than the stock market. It reacts according to economic pressures and factors (such as inflation, the unemployment rate, a Canadian or U.S. election, or predicted economic growth) to anticipate where the prime rate is headed — on the horizon.
So, bond yields typically move down well before any 'expected' prime rate drops.
You've probably noticed that the best-advertised 5-year fixed rates have come down over the past several months as interest rate drops became imminent — from being in the 5's to the low 4's (or occasional deals in the high 3's).
The only reason you'd see fixed rates changing around the timing of prime rate drops is if bond yields were reacting to something the market didn't expect — and eventually, banks would move their fixed rates in response (to manage their capital and expenses).
Read more about how fixed rates are tied to bond yield movements, and when banks will actually trigger changes.
According to True North's historical rate chart, in January 2020, our best 5-year fixed rate average for the month was around 2.6%.
This term rate hit its lowest point in January 2021 during the pandemic at around 1.45% before interest rate hikes brought it to new highs in October 2023, to about 5.65%.
Say, about another 0.25% in drop-room over the next few months (but only maybe).
You may also see them rise in reaction to volatility in bond yields, which in turn can react to anything 'economic' walking by — including what's going on with the U.S. post-election.
An incoming Trump presidency is already stoking expectancies of higher inflation in both countries due to the potential for ramped-up U.S. growth, implied tax cuts, and 10-20% tariffs (duties) that may be added to Canadian exports (about 75% of our total exports go to the U.S.).
Higher inflation in Canada can not only slow or halt rate cuts but, before that, could increase bond yields, which would increase fixed mortgage rates.
Industry experts expect the housing market to heat up early next spring, assuming that the Bank of Canada will continue to drop interest rates by at least another 0.75% into early 2025. Many buyers have held off on their home-purchase plans, waiting for improvements in affordability.
Home prices have decreased in many Ontario centres, while in others, they've held flat or have only modestly increased against the backdrop of a restrictive rate environment over the past couple of years.
So, if you're waiting simply for fixed rates to come down further, they likely won't budge enough to negate a potential rise in home prices (when increased demand rears its head) once a rush starts.
With fewer buyers around, you may find a deal or the right home without having to battle bidding wars. You can also decide to pause your plans again if you feel the timing's not right.
Fixed rates have come down to help improve home-buying power through the federal mortgage stress test — which requires you to prove you can handle payments if rates are a minimum of 5.25% or your contract rate plus 2.0%.
Despite 1.25% in prime rate drops since June 2024, variable rates haven't come down enough to outdo your stress test with most fixed rates.
Choosing a variable rate, whether you have floating or fixed payments, means you'll benefit from each prime drop along the (predicted way).
Even if interest rates hold after another 0.75% drop (in that scenario, higher inflation may halt rate cuts for a time), a 5-year variable rate may help you save more over your term vs. locking into a 3-year fixed rate now.
However, not everyone is comfortable choosing this rate type. Read over the variable benefits and risks here.
If you want to start home shopping, your professional Realtor® always prefers (and perhaps insists) that you get a mortgage pre-approval before you start.
It gives you a solid idea of what you can afford and helps your Realtor narrow down the best homes and neighbourhoods in your price range.
With bond yield and fixed mortgage rate volatility afoot, a mortgage pre-approval can hold your rate while you pace the open houses.
If fixed rates go down, you'll still be able to access that lower rate, but you're protected if rates go up.
