Valueland Tue, 05/20/2025 - 11:04

Fixed vs. Variable: Which Mortgage Rate Should You Choose?

With fixed mortgage rates currently sitting below variable rates, many borrowers are re-evaluating their options.

  • The Bank of Canada paused its rate cuts this month, leaving variable rates unchanged.
  • Volatility in bond markets - driven by global trade uncertainty - continues to influence fixed rates.
  • Choosing between fixed and variable depends heavily on your risk tolerance:
    • If you value predictability and worry about future rate hikes, fixed may offer peace of mind.
    • If you can weather short-term rate fluctuations in hopes of eventual declines, variable may be worth considering.

Tip: If variable rates in the past have caused you stress, you may be better off locking in a fixed rate today.

 

Rate Cuts Still Likely Despite Sticky Inflation

The Bank of Canada left its key rate at 2.75%, but markets still expect cuts ahead:

  • A recent Bank of Canada survey shows market participants forecast rates dropping to 2.25% by mid-2025.
  • Sticky inflation and new US tariffs on Canadian exports (like vehicles and steel) are clouding the outlook.
  • Most major banks (BMO, TD, CIBC, RBC, National Bank) still expect two or more rate cuts in 2025.
  • Scotiabank is more cautious, forecasting cuts in 2026 instead of this year.

Inflation and trade disruptions could delay cuts, but many economists believe slowing growth will push rates lower by year-end.

 

Why 3% Rates Are the Key to Unlocking Demand

Even with recent declines, current mortgage rates aren’t quite low enough to reignite the housing market:

  • The average lowest five-year fixed mortgage rate is 3.94% — not enough to attract sidelined buyers.
  • Surveys show 40% of potential buyers are waiting for rates to fall to 3% or lower before entering the market.
  • At today’s rates, many Canadians find homeownership financially out of reach:
    • Average monthly mortgage payment: $1,829
    • Comfortable threshold for most Canadians: $1,749 or less
    • In major markets like Vancouver, starter homes exceed $800,000, putting pressure on budgets.

Bottom line: Lower rates — especially around 3% — could be the turning point for affordability and buyer activity.