top of page

Fixed Mortgage Rates: More Like Fashion Trends Than You Think!

Writer's picture: Cheryl Hartwick - BrokerCheryl Hartwick - Broker

Why a Bank of Canada Rate Announcement Doesn’t Always Mean Fixed Rates Will Change


When the Bank of Canada makes a rate announcement, it’s often front-page news, and understandably so—after all, interest rates affect everything from credit cards to mortgages. However, if you’re watching for changes in fixed mortgage rates, you might notice something curious: they don’t always follow suit when the Bank of Canada raises or lowers rates. Let’s dive into why that is, and what it means for your mortgage decisions.


Understanding the Role of the Bank of Canada’s Overnight Rate

First, let’s clarify what the Bank of Canada is adjusting during these announcements. The Bank’s primary tool is the overnight rate, which influences the rates that financial institutions use to lend to each other. It has a strong impact on variable-rate mortgages and lines of credit, which tend to respond directly to these changes. But when it comes to fixed-rate mortgages, the situation is a bit different.


Fixed Rates and the Bond Market: A Separate Track

Fixed mortgage rates are primarily influenced by Canada’s bond market rather than the Bank of Canada’s overnight rate.


Here’s how it works:

  1. Bonds and Mortgage Rates Move Together: Fixed mortgage rates are tied to the interest rates on government bonds, especially those with terms of 5 years, as most fixed-rate mortgages are set for similar terms. When bond yields rise, fixed mortgage rates typically follow suit—and when yields fall, fixed rates can go down as well.

  2. Bond Yields Depend on Market Forces: The bond market responds to a range of factors beyond the Bank of Canada’s announcements. Global economic trends, inflation expectations, and even geopolitical events play a role. If the economy is expected to slow down, bond yields might drop as investors seek the relative safety of bonds. This can lead to lower fixed mortgage rates—even if the Bank of Canada’s rate has increased.


Think of it Like a Winter Coat vs. a Lightweight Jacket

Let’s imagine two types of mortgage rates as different types of outerwear:

  • A variable rate mortgage is like a lightweight jacket. It’s flexible and changes quickly with the “weather” (in this case, the Bank of Canada’s announcements). If the Bank raises rates, variable rates go up fairly quickly, and if it lowers them, variable rates often drop.

  • A fixed rate mortgage, on the other hand, is more like a classic winter coat. It’s influenced by longer-term factors, like the overall “season” (bond market conditions). Just because the temperature fluctuates one day (a Bank of Canada announcement), it doesn’t necessarily mean you’ll need a different coat right away.


Why This Matters to Homebuyers and Renewals

So, what does this mean if you’re deciding between a fixed or variable mortgage, or if your renewal date is coming up?

  1. Choosing a Mortgage Type: If you’re looking for stability, fixed rates may still be appealing, knowing that they are less responsive to short-term rate hikes. However, keep in mind that fixed rates could go up if bond yields rise, so timing is still a factor.

  2. Shopping Around at Renewal: Even if the Bank of Canada has been on a rate hike spree, you might still find competitive fixed-rate offers if bond yields remain steady or drop. Checking the bond market and consulting with your mortgage broker (like yours truly!) can help you understand where fixed rates might be headed.

  3. Keeping an Eye on Economic Trends: Fixed mortgage rates are more sensitive to long-term economic trends, so keeping an eye on things like inflation reports, unemployment rates, and international events can give you a sense of where the bond market—and fixed rates—are likely headed.


In Conclusion: Bank of Canada Rate Changes Aren’t the Full Story

While the Bank of Canada’s announcements grab headlines, fixed mortgage rates march to the beat of a different drummer. They’re tied to the bond market, which is influenced by a host of long-term and global factors. So, the next time there’s a Bank of Canada rate announcement, remember: it’s just one piece of the puzzle. Fixed rates might stay put, even if variable rates start dancing.



Curious about which option is best for you?

Feel free to reach out. I’m here to help you navigate these rates, whether you’re cozying up with a fixed rate or taking the flexible path with variable.


Key Takeaways

25 views0 comments

Recent Posts

See All

Empower

Comments


bottom of page