Canada's fixed mortgage rates surge higher as bond yields continue to rise

The current difference between the lowest available five-year fixed rate and five-year variable rate is now “quite large,” she added. The lowest five-year variable, David said, is around 3.3 per cent compared to a five-year fixed which is around 4.09 per cent. 

Over the last several days bond yields have been trending higher as oil and energy prices remain elevated and the U.S. trade war with Canada persists. 

“There is upward pressure at this moment,” David said, “and fixed rates could go up further in the coming days.” 

Most fixed-rate mortgages are tied to the five-year bond yield, so when the bond yield goes up so does the interest on fixed-rate mortgages.

Rate differences give borrowers pause to consider options

Variable-rate mortgages are tied to key rate changes by the Bank of Canada, meaning variable-rate mortgages move in lock-step with increases or decreases to the central bank’s key rate.

In a widely anticipated move, the Bank of Canada left its key overnight lending rate at 2.25 per cent Wednesday morning — a rate unchanged since Oct. 29.

While the spread between the two mortgage products isn’t “historically unusual,” she said, what’s noticeable right now is how the spread has increased over recent months “after narrowing significantly over the last couple of years.”

Volatility in the bond market is likely to persist as the U.S. war with Iran has no end in sight. That, along with Canada’s trade war with the U.S., David said, could have a significant impact on yields as inflation worries persist.

Leah Zlatkin, licensed mortgage broker and LowestRates.ca expert, says the difference between fixed and variable rates is giving borrowers pause to consider mortgage options. 

“With variable rates still coming in below comparable fixed rates, I’m seeing more interest from clients who are weighing whether the lower rate is worth the added uncertainty,” Zlatkin said.

“That tradeoff isn’t for everyone, though, and some are still leaning toward fixed because the certainty of a consistent monthly payment matters more than the potential savings.”

Why consumers may pivot into fixed-rate mortgages

However, economists forecast that the Bank of Canada will likely raise its overnight lending rate in the near future if inflation spikes due to oil prices and U.S. tariffs. 

If that happens and variable-rate mortgages rise, then consumers may pivot into fixed-rate mortgages to ensure financial stability, experts say. 

Ross McCredie, CEO and chairman of Sutton Group, said the Bank of Canada’s rate hold was a “prudent move” and that the “government shouldn’t be starting to play around too much one way or the other because they’re not really sure where inflation is going.” 

Historically, interest rates that are just above four per cent is still relatively low, McCredie added.

But the Canadian Mortgage Brokers Association (CMBA) urged the Bank of Canada to offer relief for homebuyers and owners.

“Although we respect the cautious approach the Bank of Canada’s decision displays, it does little to relieve the financial pressures that many Canadians currently face given the economic environment,” said John Woods, president of the CMBA.

He added that while holding the line on rates can be reassuring, it “fails to address one of the key barriers preventing home ownership in Canada — and that is the elevated cost of interest on mortgages.”