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 this choice during economic volatility despite any potential savings from variable rates.
The 5-year fixed rate could come down in the face of full tariffs (or even with tariff threats).
The standard 5-year fixed rate has been largely expected to maintain its current level for a while longer having already priced in 2 more expected prime rate cuts. (The bond market still faces upward pressure by inflationary headwinds, such as a lowering Canadian dollar and a stronger U.S. economy.)
However, if tariff threats become a reality — or threats spook the markets enough — investors will likely seek safer assets, increasing demand for Canadian government bonds, which typically drives bond prices up and yields down.
And, if there are suspicions that the Bank of Canada will reduce its policy rate beyond current expectations to address a declining economy, yields and fixed rates would also go lower sooner in 2025 than initially forecast.
Once they go down, though, they'll likely stay put while interest rates make their way down.
But still be 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 occur only eight times a year), the 5-year fixed rate would register ongoing volatility if, instead of full-blown tariff disruption, there were '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?
Again, because push-cost inflation affects the economy differently than demand-pull inflation, the anticipation of lowering interest rates would eventually reign over the bond market as investors turn to safer government bonds during a weaker economic print.
Could higher inflation in early 2025 raise Canadian fixed rates?
Yes, that's possible. Early on, the 5-year fixed rate could still be pushed higher by another 0.15% (or more).
The 5-year Canadian bond yield has bounced around amid recent inflationary pressures and threats of economic instability.
Bond yields could go higher in reaction to shorter-term pressures like increasing Canadian or U.S. inflation in the first few months of the year before blanket tariffs hammer the trade relationship. Look to upcoming economic readings to see how bond yields react.
However, fixed rates could also decrease if a major trade disruption on both sides looks more certain.