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.
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.
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.
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%.
Variable rates, despite 1.25% in prime rate drops since June 2024, haven't come down enough to outdo your stress test with a fixed rate.
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.
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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.
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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.