No, Fixed Rates Don't Change When Prime Does

Fixed rates are pushed around by the bond yield market, not prime.

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 yields.

And what moves bond yields and, conversely, fixed rates? The bond yield market is much bigger than the stock market and reacts according to economic pressures and factors (such as inflation, the unemployment rate, and 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.

By the time the prime rate drops, fixed-rate drops are yesterday's news.

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 expense balances).

Read more about how fixed rates are tied to bond yield movements, and when banks will actually trigger changes.

Prime (usually) moves when the Bank of Canada changes its policy rate.

When the Bank of Canada posts changes to its policy rate (which is the benchmark for where most interest rates are set), banks usually follow suit within a day or two to adjust their 'prime rate,' which directly moves variable rate products.

There have been (very) rare occasions when a bank, or banks, rebel and don't follow suit, but that's only if the central bank is judged to be moving contrary to economic conditions or detrimentally for bank business.

The Canadian banking sector is considered the 'strongest' in the world — and part of that reputation comes from a central bank that works overtime to keep and maintain the confidence of the big banks and Canadian residents.

When the prime rate needs to move, most of us understand why and hold onto that leash whether we like it or not.

Why do fixed rates have less leash to drop?

With the Bank of Canada unleashing a policy rate reduction spree (so nice to say after enduring two years of rate hikes) — variable rates still aren't lower than most fixed rates.

During ‘normal’ economic times, a 5-year variable rate (including lender discounts) is lower than a 5-year fixed. The rapid rate hikes threw a stick into the typical rate-relationship gears, and the spread relationship has been inverted for a while now.

Fixed rates have come down substantially ahead of prime rate drops, so they'll stay on a short leash, patiently waiting for kibble (aka, the rate spread to normalize).

Fixed mortgage rates may have a bit more give.

Say, about another 0.25% in drop-room over the next few months.

Assuming that rates continue along an expected trajectory, once the natural balance between fixed and variable is found again, and the economy finds a more even footing than we've seen for the past few years, fixed rates may find some room to decline.

But, you may also see them rise slightly 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. economy.

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 could bring higher bond yields and then higher fixed rates.

Or, if the economy weakens further than expected and the prime rate predictions go lower, it could bring fixed rates down again ahead of those changes.

Some good fixed news? A less stressful mortgage stress test.

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, variables haven't come down enough to outdo your stress test with most fixed rates.

Time to choose a variable rate?

Choosing a variable rate, whether you have floating or fixed payments, means you'll benefit from each prime drop along the (predicted way).

However, not everyone is comfortable choosing this rate type. Read over the variable benefits and risks here.

True North is your rate whisperer.

Our highly trained brokers know a thing or two about mortgages — and are great at coaxing your very best fixed or variable mortgage rate (in your preferred language).

We shop the lenders for you, passing along a volume discount and helping you avoid made-up fees and charges. And we pair your great rate with great company: a flexible mortgage that can help you save now and later if you need a change.

Like a happy pup proudly carrying a big stick, you’ll know the joy of saving (mortgage) thousands.

A few minutes with us could save you a pile of cash on your mortgage. Give us a shout today — online, over the phone or by email, or drop by a store near you.