An aerial view of houses east of Toronto from November, 2017. The Bank of Canada is keeping its benchmark interest rate on hold, lending stability to variable mortgage rates.Lars Hagberg/The Canadian Press
U.S. policy is having an unusually large impact on Canada’s mortgage rates, but in markedly different ways for variable and fixed rates.
On one hand, the latest round of reciprocal tariffs has dialled up the risk both of higher inflation and weaker economic growth. For now, that means the Bank of Canada is keeping its benchmark interest rate on hold, lending stability to variable mortgage rates, which tend to move in tandem with it.
On the other hand, mounting worries about the burgeoning size of U.S. debt and the impact of the war in Iran on energy prices are fuelling a global run-up in bond yields, which affect the level of fixed rates available on new and renewing mortgages. Yields are the interest rates that investors demand for holding bonds. And lately, bond investors have been demanding higher returns.
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The end result is that while variable rates have held steady, fixed rates have been creeping up. For example, on financial product comparisons site Ratehub.ca, the lowest nationally available five-year variable mortgage rates were still well below the 4-per-cent mark. By comparison, five-year fixed rates have climbed firmly above it.
For Canadians buying a home or renewing their mortgage, it’s a tricky landscape to navigate, particularly given the uncertainty about what the U.S. might do next, said David Larock, a mortgage broker and owner of Toronto-based Integrated Mortgage Planners.
But Mr. Larock said he’s still using the same general guidelines he relies on to help borrowers make a decision they won’t regret. For example, if someone is on the fence about whether to choose a fixed or variable rate, he typically nudges them toward a fixed rate.
Choosing a variable rate makes sense when you have a strongly held view that it will save you money over the course of the mortgage term. Generally, that means you have a pessimistic outlook on how Canada’s economy will do over the next several years, Mr. Larock said.
Going variable can also be a good option if there’s a reasonable chance you’ll have to break your mortgage before the end of the term, since the penalty for doing so is typically much lower with a variable rate. If you’re opting for a variable rate, you should also make sure that you can tolerate the volatility that comes with it and can afford to be wrong about where rates are headed, Mr. Larock said.
Bond yields are rising. How should that factor into mortgage shopping?
For Canadians who chose to go fixed, the slam-dunk move right now is to lock in a rate as soon as possible, usually up to 120 days before the mortgage renewal rate, Mr. Larock said. Locking in means that a lender commits to providing a certain rate even if rates go up before the end of your current term. However, if rates decline during that period, there is no commitment to stick to the higher, locked-in rate.
That’s different from renewing early, which is generally a bad idea now, Mr. Larock said. Banks that offer a renewal months ahead of the end of the term typically provide uncompetitive rates and an early renewal means homeowners are giving up their current rate, which may be lower.
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In terms of which fixed-rate term to choose, Mr. Larock said his customers are currently opting for either a three-year term or the classic five-year option, which has traditionally been the most popular pick for Canadian homeowners.
Three-year rates are slightly lower at the moment. For example, on Ratehub, the lowest nationally available three-year fixed rate for an insured mortgage was 3.94 per cent, compared to 4.09 per cent for a five-year fixed rate.
A three-year rate locks you in for only a few years, if you believe rates are headed down. But it would still last until after the end of U.S. President Donald Trump’s current term in office in January, 2029, Mr. Larock noted.
On the other hand, a five-year fixed rate offers stability for longer – and at only marginally higher borrowing costs – at a time when the gap between short- and long-term interest rates is widening, he said.
Given the current rise in longer-term bond yields, which affect longer-term fixed rate mortgages, Mr. Larock said he expects five-year fixed rates to climb soon.
“I think five-year rates are on sale right now.”
