Interest rates are constantly evolving, and those changes can have a significant impact on your mortgage. Whether you’re a current homeowner or exploring your options as a buyer, understanding what drives these changes—and how they affect fixed and variable rates—can help you make smarter financial decisions.
Fixed vs. Variable Rates: What Drives Them?
One of the key differences between fixed and variable-rate mortgages is what influences their movement:
- Variable Rates: These are directly tied to the Bank of Canada’s (BoC) policy rate, which is set periodically to guide the economy. When the BoC adjusts its policy rate, banks respond by changing their prime lending rates—and that’s what impacts your variable mortgage rate. For example, if the BoC increases its rate to combat inflation, variable mortgage rates typically rise as a result.
- Fixed Rates: These, on the other hand, are influenced by bond yields in the financial markets. Bond yields represent the return investors expect when buying government bonds. When bond yields go up—often in response to economic trends or market expectations about inflation—fixed mortgage rates tend to increase.
This difference means that while variable rates respond more directly to central bank policy, fixed rates are shaped by broader economic forces like investor sentiment and global markets.
Why Does This Matter for You?
Historically, from 1991 to 2022, fixed-rate mortgages were often the better choice, offering predictable payments and stability. But in today’s shifting landscape, variable-rate mortgages are becoming more attractive, particularly for those who can handle some uncertainty.
Here’s what to consider:
- If you choose a variable rate, your payments could fluctuate over time as the BoC adjusts its policy rate. However, you might benefit from lower rates during periods of economic stability.
- Opting for a fixed rate means locking in a predictable payment schedule, but you may pay a premium, especially if bond yields remain high.
What’s Happening Right Now?
The Bank of Canada has been adjusting its policy rate to address inflation, which has caused variable mortgage rates to drop over the past year. However, bond yields have also fluctuated, meaning fixed rates are experiencing upward pressure. This creates a challenging but navigable environment for borrowers.
How to Decide
The decision between fixed and variable ultimately comes down to your personal circumstances:
- Risk Tolerance: Are you comfortable with payment changes if variable rates increase?
- Budget Stability: Do you prefer knowing exactly what your payments will be for the life of your mortgage?
- Market Outlook: Are you optimistic about rates stabilizing or decreasing in the near future?
Let’s Work Together to Find Your Best Option
I understand that the world of mortgages can feel complicated, especially with all the factors at play. That’s why I’m here to guide you. Whether you’re renewing, refinancing, or buying a new home, I’ll help you understand your options and choose the mortgage that aligns with your goals.
Now is the time to get ahead of these changes. Let’s start a conversation and make a plan that works for you.