When the prime rate falls, the fixed-rate crowd asks 'Do we win??"
Fixed rates aren't directly tied to Bank of Canada and prime rate drops — so no bonus round for you. Here's why.
Everybody in mortgage land gets excited when interest rates drop. They then call their expert True North broker to see how much their rate is falling.
Variable-rate mortgage and HELOC holders get the good news — that their rate, which is directly affected by Bank of Canada and bank prime rate cuts, will be lowered.
But if you have a fixed-rate mortgage or a pre-approval hold ahead of buying or renewing a home? Like a done dog that's plopped down mid-walk — it ain't budging.
Here's what does move fixed mortgage rates.
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 (mortgage) savings sense. Read more here.
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 you see the Bank of Canada drop its policy rate, fixed rates have likely already declined.
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.
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%.
When the Bank of Canada changes its policy rate (the benchmark for most interest rates), 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 stems 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.
5-year fixed rates are typically higher than 5-year variable rates (including lender discounts) by a spread of 0.5% to 1.0%.
Now that the normal spread relationship has reasserted itself (it was unnaturally inverted for months during the meteoric rate rise between March 2022 and June 2024), fixed rates won't post a sudden, substantial drop.
They'll stay on a short leash, patiently waiting for kibble (aka, the chance to drop ahead of a BoC rate cut, should another one be in the cards).
With an ongoing trade disruption imposed by U.S. President Trump, economic turmoil is already stoking expectations of a deeper slowdown in Canada. Yet tariffs and trade disruptions are pushing inflation higher, which will likely place a floor under how far interest rates could fall.
Fixed rate could also rise, even if the BoC policy stays put, as bond yields react to anything 'economic' walking by — including what's going on with the U.S. economy.
Fixed and variable rates have come down considerably since June 2024, helping improve your home-buying power through the federal mortgage stress test — which requires you to demonstrate you can handle payments if rates are a minimum of 5.25% or your contract rate plus 2.0%.
Choosing a variable rate, whether you have floating or fixed payments, means you'll benefit from each prime drop if interest rates trend down. A 5-year variable rate is also typically lower than a 5-year fixed rate, which can offer immediate savings (assuming the rate doesn't increase).
However, not everyone is comfortable choosing this rate type. Read over the variable benefits and risks here.
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 hidden 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.
Various tools and functions of this website perform calculations and provide cost estimates. These tools are designed for illustrative purposes only and make many assumptions that may not reflect all situations. Please use these tools in collaboration with a True North Mortgage agent. True North Mortgage does not guarantee the accuracy, reliability or completeness of these tools or calculations.
Continually updated. Where rates may go now and later — and what’s driving them.
Find out how what penalty you might pay and when it makes sense to break.
The prime rate sets the temperature for your mortgage costs. Learn more.
