Will Fixed Mortgage Rates Keep Falling? Here’s What You Need to Know
The question on everyone’s mind is: Will fixed mortgage rates keep falling? While the market consensus suggests they might, the future of fixed mortgage rates remains uncertain. Although recent trends in monetary policy point to potential rate cuts, broader economic factors and global bond market dynamics suggest borrowers should proceed with caution. Here’s what you need to know.
What’s Happening with Interest Rates?
To understand where fixed mortgage rates may be going, it’s essential to first look at recent changes in monetary policy. The Bank of Canada (BoC) aggressively raised its key interest rate after the pandemic as inflation soared. However, now that inflation has cooled and returned to normal levels, the BoC no longer needs to maintain such a tight stance.
Since then, the BoC has reduced its policy rate from 5.0% to 3.75%, and while this is lower, it still limits economic demand. To truly bring rates to a neutral level—where they neither stimulate nor restrict economic activity—the BoC needs to cut rates to around 2.5% to 3%.
Given this, most market experts expect the BoC to continue cutting rates. Many predict the Bank could lower rates by another .25% to .50%. The media has reported this expectation, with many suggesting that lower rates are on the horizon for borrowers.
Why Lower Bank of Canada Rates Might Not Lower Fixed Mortgage Rates
While it’s true that the BoC’s policy rate cuts will likely reduce variable mortgage rates, a crucial detail is missing from the conversation regarding fixed rates: Fixed mortgage rates are not directly tied to the BoC’s policy rate. Instead, they are determined by the yields on Government of Canada (GoC) bonds, which reflect broader economic factors.
While influenced by the BoC’s expected rate movements, bond yields are also impacted by other factors—notably, the direction of U.S. Treasury yields. U.S. Treasury yields have been rising steadily, which could significantly affect Canadian fixed mortgage rates.
The U.S. Connection: Why Rising U.S. Treasury Yields Matter
U.S. Treasury yields have been climbing, and there’s an apparent reason: Bond markets are reacting to expectations about the U.S. economy and the Federal Reserve’s future actions. As the likelihood of a second term for Donald Trump in the 2024 U.S. presidential election increased, Treasury yields began to rise, reflecting growing uncertainty and inflation concerns in the U.S.
Recent inflation data from the U.S. reinforced this trend — October inflation came in at 2.6%, up from 2.4% in September. While this was not a huge surprise, it added to concerns that U.S. inflation might remain more persistent than anticipated, which could prompt the Federal Reserve to hold off on cutting rates as expected.
This global bond market dynamic matters because Canadian GoC bond yields tend to track U.S. Treasury yields. So, while the BoC may be cutting its policy rate, rising U.S. yields could push Canadian fixed mortgage rates higher — even if variable rates fall due to BoC cuts.
What Does This Mean for Borrowers?
There’s an essential point for those hoping to see lower fixed mortgage rates: Government of Canada bond yields, which largely determine fixed rates, have already priced in expected BoC rate cuts. In other words, if fixed rates are going to fall further, it won’t just be because the BoC has cut rates as expected. It requires a significant economic event, such as a sharper-than-expected downturn, to lower bond yields.
The more immediate risk, however, comes from rising U.S. Treasury yields. Canadian fixed mortgage rates may follow suit if these continue to climb, even as the BoC lowers its policy rate.
The Bottom Line: Proceed with Caution
If you’re considering locking in a fixed mortgage rate or hoping to switch from a variable rate to a fixed one shortly, you must know the risks. While fixed rates could fall further, this is not guaranteed. Rising U.S. Treasury yields could push fixed rates higher, even as the BoC continues its rate cuts.
As always, the best strategy for making an informed decision is staying informed and considering a range of potential outcomes. This knowledge will empower you to make the best financial decisions.
Summary
Last week, Government of Canada (GoC) bond yields were driven higher by their U.S. Treasury counterparts as U.S. bond investors adjusted to expectations of a slower pace of Federal Reserve rate cuts. As a result, fixed mortgage rates in Canada are more likely to increase than decrease in the near term. Meanwhile, I anticipate that the Bank of Canada (BoC) will continue reducing its policy rate, leading to further declines in variable mortgage rates. This could narrow the gap between fixed and variable mortgage rates more quickly than many borrowers might expect.
If you’re purchasing, refinancing, or renewing your mortgage, I’d love to help you find the best rates and terms for your unique situation. As an independent, full-time mortgage professional, I aim to provide clear, fact-based solutions that work for you. Contact me or schedule a time for a mortgage review—I’m here to guide you through the process with transparency and expert advice!
