Many Canadians assume that when the Bank of Canada (BoC) adjusts its overnight rate, fixed mortgage rates will follow suit. After all, if the BoC lowers rates, it should make borrowing cheaper, right? In reality, the connection isn’t quite so direct for fixed mortgage rates. Here’s why.

The BoC Rate and Variable Mortgages

The Bank of Canada’s overnight rate directly impacts variable mortgage rates and lines of credit. When the BoC adjusts this rate, lenders often change their prime rate accordingly, meaning variable-rate borrowers see the impact quickly. This clear link makes sense, given that the BoC’s rate is what banks use for short-term borrowing. However, fixed mortgage rates operate differently.

Fixed Rates Follow Bond Yields, Not the Overnight Rate

Fixed mortgage rates are primarily influenced by bond yields, specifically the 5-year Government of Canada bond yield. Bond yields respond to a wider set of economic factors like inflation expectations, market sentiment, and global economic shifts. When inflation is high, bond yields tend to rise as investors demand higher returns to counteract the decreased purchasing power. This, in turn, pushes fixed mortgage rates up.
When the BoC raises its rate, it’s often a response to economic growth or inflation pressures. Since these same pressures can impact bond yields, there’s an indirect relationship. However, there’s no guarantee the two will align—bond markets may respond differently to global economic factors, such as U.S. Federal Reserve policies or international market volatility.

Global Factors and Investor Sentiment

Another reason fixed mortgage rates don’t move in lockstep with the BoC’s overnight rate is the influence of global economic conditions. For instance, Canadian bond yields are often influenced by U.S. Treasury yields, as global investors weigh Canadian bonds against U.S. bonds. If U.S. yields rise, Canadian yields may follow, even if the Bank of Canada’s rate stays steady. Additionally, in times of economic uncertainty, investors may flock to safer assets like government bonds, driving yields (and potentially fixed mortgage rates) lower regardless of domestic rate changes.

Why It Matters for Borrowers

Understanding the difference between variable and fixed rate drivers is key for making informed mortgage decisions. While the BoC’s rate has an immediate effect on variable rates, fixed rates hinge on the bond market’s reaction to a range of economic forces. This is why fixed rates may stay high even when the BoC lowers its rate, or vice versa.

Key Takeaway

Fixed mortgage rates don’t mirror the Bank of Canada’s rate decisions. Instead, they’re more directly tied to bond yields, which respond to inflation expectations, global economic conditions, and investor sentiment. Knowing this can empower you to make better mortgage decisions based on current market realities, rather than simply watching the BoC rate.

The next time the BoC announces a rate change, remember that while variable rates will likely be impacted, fixed rates have a different playbook. Consider both rates’ unique drivers to choose a mortgage strategy that aligns with your financial goals.

Why is this information so important now?

As the Bank of Canada continues to lower its key overnight rate – due, in part, to the decrease in inflationary pressures – many Canadians are waiting anxiously for the fixed rate environment to follow suit. By staying informed about bond yields, BoC announcements, and broader economic trends, consumers can time their mortgage renewal to align with market conditions. Using a rate hold, evaluating fixed vs. variable options based on economic forecasts, and seeking professional advice can optimize renewal outcomes. This proactive approach helps borrowers save on interest and choose a mortgage that best fits their financial goals, no matter where rates head next. This same strategy can be applied when looking to sell and buy or just buy.

Kari Gares
Broker Owner
Verico Mortgage House – Kari Gares