Why Fixed Rates Aren’t Falling with the Bank of Canada’s Cuts

A lot of Canadians think fixed mortgage rates automatically follow the Bank of Canada’s moves. Here’s the problem with that thinking: fixed rates aren’t driven by the central bank’s rate but rather by bond yields, which don’t respond as directly to rate cuts. When bond yields stay high or increase, fixed mortgage rates do the same, no matter how low the Bank of Canada’s rate goes.

And former TD Bank economist Don Drummond believes bond yields aren’t going down much further. Yields on long-term bonds, especially the 5-year government bond, factor in economic uncertainties like inflation and recession risks. This “positive yield curve” reflects lenders’ need for a premium to offset long-term risks, and it’s the primary reason fixed mortgage rates are sticking.

Guidance: Homeowners who are waiting for fixed rates to drop may be waiting indefinitely. Investors may want to plan their real estate financing assuming today’s fixed rates are here to stay.

The Low-Rate Era Was an Outlier, Not the New Normal

In 2008, the financial crisis triggered a worldwide economic response that included massive interest rate cuts and easing monetary policies. Canada’s ultra-low fixed rates from 2011 to 2019 reflected that crisis response—not a lasting trend. But as Drummond says, those rock-bottom rates were never meant to be permanent and came with unexpected costs, like rapid home price increases that made properties less affordable despite low rates.

Drummond doesn’t expect rates to return to those lows. Instead, he anticipates a leveling off around current levels, with a “new normal” that could see 5-year fixed rates staying between 4% and 5%—a significant departure from the sub-3% rates many became accustomed to.

Guidance: If you’re a homeowner considering refinancing, it’s wise to compare fixed and variable options now rather than waiting for rates to drop further. Investors should also evaluate how today’s rates impact cash flow over the long term and consider rate-lock strategies to mitigate future risks.

Stagnant Productivity and Growth: Economic Realities Holding Rates Up

Another factor influencing fixed mortgage rates is Canada’s weak productivity growth and slowing GDP. Productivity used to grow at 3% annually in the 1960s, yet from 2000 to 2019, that rate fell to 1% per year, and has since dropped even closer to zero. This economic sluggishness, combined with limited GDP growth, holds back bond market optimism, pushing lenders to maintain higher yields on bonds.

Without stronger economic performance, bond yields—and, in turn, fixed mortgage rates—are unlikely to drop, because lenders won’t take on long-term lending risks without a premium that justifies it.

Guidance: For homeowners, stable (or rising) rates mean it’s time to review your budget to ensure that your mortgage payments fit comfortably even if you need to renew at a higher rate. Real estate investors, meanwhile, should calculate how fixed rates affect cash flow projections and consider lower variable rates if they’re suitable.

Population Growth Outpacing Housing Supply: More Pressure on Rates

Canada’s high immigration rate, aimed at boosting economic growth, is a double-edged sword when it comes to housing and mortgage rates. Immigration is adding a lot of demand to Canada’s housing market—far more than the country’s annual construction of new housing units can meet. This supply-demand imbalance pushes real estate prices up, which in turn can keep inflation in the housing market high, creating indirect pressure on fixed mortgage rates.

Guidance: Homeowners and investors should approach their mortgage decisions understanding that strong housing demand and limited supply are long-term trends. For those buying new properties, rate stability is essential to ensure your payments align with your cash flow and long-term investment goals.

A Shift in Strategy for Today’s Mortgage Landscape

The low fixed rates of the past decade may have been the exception, not the rule. Today’s economic indicators suggest fixed mortgage rates may hold steady for the foreseeable future. So what can you do to make the best of it?

1. Consider Fixed and Variable Mixes: Some lenders offer blended mortgages that combine a portion of fixed and variable rates, helping you balance the stability of fixed rates with the potential cost savings of variable rates if Bank of Canada cuts continue.
2. Secure a Rate Hold if You’re Shopping: Many lenders will lock in your rate for 90 to 120 days. If you’re in the market to buy or refinance, take advantage of rate holds to protect yourself against sudden hikes.
3. Use Tactics Like The Cascade Mortgage or Debt Swap Strategies: Homeowners with significant equity should consider advanced financial tactics like the Cascade Mortgage or Debt Swap strategies. These approaches can help reduce the overall cost of borrowing while allowing you to benefit from the stability of a fixed-rate mortgage. Consulting with a mortgage professional can help you assess which strategy aligns best with your financial goals.
4. Plan Your Budget Conservatively: Don’t assume rates will drop by the time your mortgage is up for renewal. Factor in a buffer for stable rates to ensure affordability over time.
5. Evaluate Long-Term Cash Flow on Investment Properties: For investors, knowing your cash flow under today’s rate environment is critical to sound property management and financing decisions. It might be wise to consider lower variable rates if they suit your risk tolerance.

The Takeaway

Fixed mortgage rates aren’t as closely tied to the Bank of Canada’s rate cuts as many Canadians think. Instead, they’re influenced by bond yields, which respond to different economic factors. With Canada’s weak productivity, ongoing inflation concerns, and strong housing demand, fixed mortgage rates may well stay high. Homeowners and investors alike should avoid banking on a rate drop and instead consider how to adapt to this “new normal.”

It’s time to shift strategies, plan conservatively, and prioritize stability over the assumption that fixed rates will return to previous lows. By understanding the forces behind fixed mortgage rates, you’ll be better prepared to make informed decisions—whether you’re buying, refinancing, or investing for the long term.