Many Canadians assume that when the Bank of Canada (BoC) changes its policy rate, fixed mortgage rates automatically follow. But the reality is more complex. Understanding how fixed mortgage rates are influenced can give you an edge in securing the best financing for your home or investment.
How Fixed Rates Are Determined
Unlike variable rates, which are directly tied to the BoC’s policy rate, fixed mortgage rates are primarily influenced by bond yields, specifically the Government of Canada’s 5-year bond yield. Lenders use these yields as a benchmark to set their fixed rates, typically adding a spread to account for risk and profit margins.
When the BoC raises its overnight rate, it signals efforts to control inflation by making borrowing more expensive. This often leads to a rise in bond yields, pushing fixed mortgage rates higher. Conversely, when the BoC lowers its rate to stimulate the economy, bond yields may drop, leading to lower fixed rates.
However, this correlation is not always one-to-one. Markets react in advance of BoC decisions, pricing in expected moves. If investors anticipate a future rate cut, bond yields may drop before the BoC even acts, lowering fixed rates ahead of time.
What This Means for You?
Fixed Rates Can Move Before the BoC Does
If you’re waiting for the BoC to cut rates before locking in a fixed mortgage, you may be too late. Lenders adjust rates based on bond markets, which react ahead of official announcements.
Monitor Bond Yields, Not Just the BoC
Keep an eye on the 5-year Government of Canada bond yield to get a sense of where fixed rates are headed. If yields drop, fixed rates may soon follow.
Consider Your Strategy
- If bond yields are trending downward, locking in a fixed rate now could secure a lower payment before rates climb.
- If bond yields seem high but are expected to fall, a short-term fixed rate or variable rate may give you more flexibility.
Rethink Your Mortgage Approach
Instead of waiting for the BoC to dictate your mortgage decisions, take control by understanding market trends. Whether you’re a first-time buyer, a homeowner up for renewal, or an investor, being proactive can help you secure the best mortgage for your situation.
