Fixed mortgage rates — stability amid trade and economic shifts.
Unlike variable rates, fixed mortgage rates are influenced by the bond market and set according to bond yields, which respond to market factors and fluctuations. This rate type doesn't follow interest rate changes but instead anticipates where they're going.
Fixed mortgage rates are the favourite choice of risk-averse homeowners, and many may stick with a fixed rate during economic volatility despite any potential savings from variable rates.
With full tariffs, the 5-year fixed rate could drop more if interest rates go lower.
Currently, the 5-year fixed rate market has about one more prime rate cut priced in.
But now that tariffs are a reality, investors could seek safer assets, increasing demand for Canadian government bonds, which typically drives bond prices up and yields down. Yields on a steady downward trend can be an indication that the economy is in trouble, predicating lowering prime rates.
If the BoC is going to reduce prime rates further, fixed rates will head down ahead of those cuts — though probably in typical roller-coaster fashion. Bond yields react to everything (economically) under the sun, every day, which can (eventually) push fixed mortgage rates up or down in a range.
No matter the decline, at some point, fixed rates will stay put as prime rates (aka variable mortgage rates) make their way down.
A fixed rate is still (usually) higher than a variable rate.
5-year fixed rates are usually higher than 5-year variable rates (including lender discount off prime) by a spread of about 0.25% to 1.0%. Variable rates are typically lower than fixed rates because of the increased risk of change.
This natural rate relationship flipped during the post-pandemic Bank of Canada's 'extremely fast' rate-hike cycle.
As interest rates return to earth, these rate types will assume their historical spread relationship.
Keep in mind that typical lender 'discounts off prime' offered on variable rates may shrink during times of significant financial stress but are still likely to deliver mortgage savings over a fixed rate.
How would fixed rates behave with tariff on, tariff off?
Much more so than the variable rate (prime rate decisions are set for only eight times a year), the 5-year fixed rate would register ongoing volatility, especially if there are 'negotiations' in tariffs along the way.
Market uncertainty could push bond yields around, and mortgage lenders would raise and lower fixed rates accordingly to keep their mortgage costs in line.
Wouldn't bond yields increase in response to tariff-induced inflation?
Yes, bond yields might temporarily increase in response to tariff-related inflation, but because this cost-push cause of the inflation affects the economy differently than a demand-pull cause, the anticipation of lowering interest rates — as tariffs weaken the economy — would eventually reign to lower bond yields as investors turn to safer government bonds during a weaker economic print.
Could higher inflation in early 2025 raise Canadian fixed rates?
Yes. As tariffs hammer trade relationships and logistics (supply chains), inflation could worry the markets and send 5-year Canadian bond yields higher.
So then, 5-year fixed rates might rise by about 0.15% (or more) higher if inflation worries pull ahead of economic ones for a time. Keep an eye on upcoming economic readings to see how bond yields react.
However, with trade turmoil the new state of being, over time, fixed rates have more potential to decrease rather than increase.