Interest rates on fixed-rate mortgages won’t go down any time soon as U.S. tariffs continue to cast uncertainty on global markets, pushing mortgage shoppers to inquire more about variable rates, brokers say.
On Wednesday, the Bank of Canada held its key interest rate at 2.75 per cent, the second consecutive pause after seven rate cuts since June 2024. That means interest rates on variable-rate mortgages will remain unchanged.
Variable-rate mortgages are tied to 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. Meanwhile, most fixed-rate mortgages are tied to the five-year bond yield; when the bond yield goes up so does the interest on fixed-rate mortgages.
In the early weeks of April, bond yields plunged after U.S. President Donald Trump announced his steep global reciprocal tariffs.
“During this time the market was in a tizzy,” said Penelope Graham, mortgage expert at Ratehub.ca.
Then the market became extremely volatile, as investors jumped ship from the 10-year U.S. treasury yield, causing it to shoot up and impacting the Government of Canada’s five-year yield, which has remained “firmly” above 2.7 per cent for many weeks, she said.
“In recent weeks it’s actually been in the upper 2.8 per cent to 2.9 per cent range, and has remained quite stagnant and high,” Graham said.
“Fortunately, this hasn’t yet had a substantial impact on increases to fixed-rate mortgages’ interest rates,” she said, noting the lowest five-year fixed rate is 3.84 per cent, which is still “pretty competitive.”
But upward pressure on bond yields persists as the U.S. trade wars continue to impact global markets.
“It won’t take much to incentivize lenders to raise interest rates if we see bonds continue to rise,” Graham said. “It’s unlikely we’ll see any dramatic decrease to fixed rates in the foreseeable future.”
This development has led to increased interest in variable-rate mortgages, she said. Of all inquiries made to Ratehub.ca, the five-year variable-rate mortgage accounted for 8 per cent in the first half of the year as opposed to 5 per cent in the first half of 2024.
Economists forecast that the Bank of Canada could continue its rate cut cycle in the second half of the year, or hold the key rate.
Historically, when there have been six to seven cuts, “it doesn’t go down further,” said Leah Zlatkin, mortgage broker and expert with LowestRates.ca.
“Rates typically go up again after this many cuts, so if you choose a variable-rate mortgage you’re betting against history.”
And while mortgage holders or shoppers may want to wait for interest rates to drop further, historically the fixed and variable-rate mortgages are in line with historical norms, she said.
During the pandemic, the one to two per cent interest rates offered were abnormal, Zlatkin said, adding mortgage rates won’t go back down to those historic lows again.
“People have this idea that interest rates should be one or two per cent, but that’s the wrong train of thought,” she said. “Interest rates in the four to five per cent range is the new normal.”
