Fixed Or Variable Mortgage | Canadian Real Estate Wealth

The Bank of Canada’s latest decision to lower the overnight lending rate by 25 basis points from 3.25% to 3% is giving homeowners and prospective buyers plenty to consider. With two previous half-point cuts in late 2024, this latest move continues to ease pressure on borrowers with variable-rate mortgages. But does it make variable rates the smarter choice over fixed rates? Or have fixed rates bottomed out, making them the safer long-term bet?

How the Rate Cut Impacts Borrowers

For those with variable-rate mortgages, the immediate impact is clear—lower monthly payments. Since variable rates move in direct response to the Bank of Canada’s policy changes, this latest reduction means lower interest costs, providing much-needed relief to homeowners who have seen their payments climb over the past two years. If further cuts happen in 2025, as some analysts expect, variable-rate borrowers stand to benefit even more.

Fixed mortgage rates, on the other hand, are influenced more by bond yields than by the Bank of Canada’s overnight rate. Recent volatility in the bond market has led to fluctuations in fixed rates, but the overall trend has been downward. This has raised the question: Have fixed rates hit their lowest point, or is there still room for further declines?

Should You Lock in a Fixed Rate Now?

While fixed rates have fallen in response to bond yield movements, predicting their future direction is challenging. If economic uncertainty persists or inflation remains under control, bond yields could continue to soften, potentially leading to further reductions in fixed mortgage rates. However, if investor sentiment shifts and yields rise, fixed rates could begin climbing again.

A critical consideration is that, even if you believe rates may decline further, it is important to pay attention to market signals, rather than your personal expectations. Recently, bond markets have shown resistance to significant declines, suggesting that a bottom floor for fixed rates may be forming. Although bond yields have dipped slightly in 2025 to date, they remain essentially at the same level as in September 2024, exhibiting a flat trend. On the other hand, variable rates have dropped by 1.25%.

For those who value stability, locking in a fixed rate at today’s lower levels could provide peace of mind, particularly if future rate movements are unpredictable. Borrowers who need certainty in their monthly payments—such as first-time buyers or those nearing the end of their mortgage term—may find fixed rates to be the safer option.

Is Variable Still Worth the Risk?

Despite the latest rate cut, choosing a variable-rate mortgage still comes with uncertainty. The Bank of Canada has indicated that while further reductions are possible, they will depend on economic conditions. Inflation trends, employment data, and global economic risks will all play a role in determining whether more rate cuts are on the horizon or if the central bank will need to pause.

Historically, variable rates have outperformed fixed rates over the long term. However, in periods of rate hikes, borrowers with variable mortgages have faced payment shocks. Anyone considering a variable-rate mortgage today should be prepared for potential fluctuations and have financial flexibility to absorb any changes.

What’s the Best Strategy?

For those currently shopping for a mortgage or renewing their term, the key is to evaluate both options carefully. Fixed rates provide security at the cost of potential savings if rates fall further, while variable rates offer immediate relief with the possibility of more savings—if the Bank of Canada continues its downward trend.

One way to hedge against uncertainty is to consider a hybrid mortgage, which splits borrowing between fixed and variable rates, offering a balance between stability and flexibility. Additionally, securing a mortgage pre-approval with a rate hold can provide protection against sudden market changes while giving borrowers time to assess their options.

Bottom Line

The latest rate cut has made variable rates more attractive in the short term, but the decision between fixed and variable should not be based on rate movements alone. Borrowers should weigh their financial situation, risk tolerance, and market outlook before making a decision. While fixed rates offer certainty, variable rates could lead to greater savings if further cuts occur—but only for those comfortable with potential volatility.