Understanding your tolerance for risk is key when choosing a variable mortgage rate.Nithirut14/iStockPhoto / Getty Images
After nearly three years as the cheapest option, fixed mortgage rates are now higher than variable.
It’s been a tough few weeks for bond yields, which underpin the pricing for fixed rates; the five-year government of Canada yield spent the latter half of July above 3 per cent. A number of lenders responded by hiking their fixed mortgage rates, pushing the lowest five-year insured option in Canada up to 4.04 per cent from the previous 3.89 per cent. That officially puts fixed rates above the lowest five-year variable term, which is currently 3.95 per cent.
This is the first time since October, 2022 that fixed rates have been the pricier option. Back then, variable rates were rising because of the Bank of Canada’s prolonged hiking cycle, from March, 2022 to July, 2023. That made fixed rates an obvious choice for many borrowers, since they offered cost savings and peace of mind.
Even as variable rates started to fall again in the second half of 2024, the spread between the two types remained wide enough that locking in made more sense: Fixed rate was still the choice of 62 per cent of borrowers at the start of 2025, according to the Canada Mortgage and Housing Corporation.
But now, with a scant nine-basis-point difference between the two, the choice is less clear – especially if variable rates soon become even cheaper. (There are 100 basis points in a percentage point.) The latest round of economic data – namely the weak July jobs report – is starting to show the impact of the sustained trade war, and that’s building a case for more rate cuts this fall.
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The Bank was already seriously mulling one over in July. The minutes from its latest rate decision show some members of the governing council were in favour of a cut but ultimately held off owing to underlying inflation strength. Increasing political and economic pressure on the U.S. central bank to slash American interest rates also opens the door for looser monetary policy in Canada.
Meanwhile, bond yields are going nowhere fast. Various U.S. trade agreements with other countries have perked up stock markets and made investors less interested in safe haven options, and there’s still worry that inflation will stay high both north and south of the border – all of which keep yields elevated. Until there’s an economic event that materially moves the dial, borrowers can expect fixed rates to stay firmly above 4 per cent for now.
For rate shoppers, this can complicate their decision. Historically, variable mortgage rates are believed to offer better value over time – but just ask anyone who’s held one over the last five years how that’s turned out.
The Bank of Canada increased its rate by a whopping 475 basis points between 2022 and 2023, putting enormous payment pressure on borrowers. Even with the most recent round of rate cuts factored in, many variable rate holders still pay hundreds more a month than when they first secured their mortgages.
And, regardless of how many rate cuts materialize this year, there’s still a possibility of higher tariffs, spiking prices and runaway inflation – all of which can rapidly change the central bank’s course.
That’s why understanding your own tolerance for risk is key when choosing a variable mortgage rate, along with knowing whether your household budget can absorb higher mortgage payments.
It’s also smart to explore a potential out should the market move quickly; many lenders allow variable rate borrowers to convert to their posted fixed-rate option if desired. Taking out a shorter fixed term when the rate outlook is unclear is another tactic to ride out volatility in the hopes of lower interest rates come renewal time.
The bottom line is to have a strategy in place when choosing your mortgage term and type – even when the risk looks to be higher reward.
Penelope Graham is the head of content at Ratehub.ca
