Why fixed mortgage rates don’t always drop with rate cuts

The BoC’s tone during its policy-rate announcements matters, Mr. Rethazy notes. Even when rates drop, hints of inflation concerns or potential future hikes can push bond yields higher, which in some cases could drive fixed mortgage rates higher.

He explains that fixed mortgage rates started dropping early in 2024, which was well before the BoC started to cut rates. This was because the market had confidence that these rate cuts were coming.

This isn’t new; something similar happened in 2021 when fixed rates went up before the central bank raised rates in 2022. So, when the Bank lowered rates in June 2024, variable-rate mortgages got cheaper, but fixed rates had already adjusted earlier based on those expectations.

In a volatile rate environment, many homeowners find deciding between a fixed- or variable-rate mortgage challenging. Mr. Rethazy suggests seeking guidance based on the outlook for interest rates and the individual’s or family’s long-term financial goals from a mortgage advisor.

Homeowners should also understand their risk tolerance for rate fluctuations. For instance, choosing a variable-rate mortgage means that your interest rate may increase with each change from the BoC. Although the BoC is expected to continue to drop rates in 2025, any future increases from the BoC could leave you paying more for your mortgage.

Meanwhile, a fixed rate mortgage protects you in case rates increase, but you would not benefit from any future rate cuts from the BoC.

“Regardless of which mortgage option you take, always consider your financial goals first – and the bigger picture. An advisor can also help you understand how recent announcements from the BoC and current economic conditions may impact your decisions.” Mr. Rethazy says.