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.

BoC Holds Rates Steady Amid Global Economic Uncertainty

The Bank of Canada is choosing caution in the face of mounting global economic headwinds. Its decision to maintain the overnight rate at 2.75% reflects concerns over inflation, but many industry voices are calling for further cuts to ease the burden on mortgage holders and homebuyers.

🔹 Economic stress building: Unemployment has risen to 6.7%, the highest since the pandemic years, while consumer and business confidence continues to fall.
🔹 No relief for borrowers: With U.S. tariffs pressuring Canadian exports and increasing financial strain, many were hoping for a rate cut to ease mortgage payments.
🔹 CMBA-BC urges action: The Canadian Mortgage Brokers Association – BC argues that holding rates steady misses the mark and is calling for targeted government support and meaningful housing policy reforms.

While the hold may signal short-term caution, all eyes are now on the Bank’s next moves in the face of ongoing trade and economic turbulence.

Further Cuts Still Likely Despite the BoC’s Cautious Language

Even with a steady rate today, economists warn that worsening trade tensions and economic softness may force the Bank of Canada to act again before the year ends.

🔹 Trade war uncertainty: U.S. President Trump’s tariffs on steel, aluminum, and other goods continue to disrupt Canada’s economy. The threat of more tariffs looms large.
🔹 BoC treading lightly: Governor Tiff Macklem emphasized the “massive uncertainty” the central bank is facing, but left the door open for future cuts if conditions worsen.
🔹 Rate cuts expected later in 2025: BMO’s economists believe the risks to economic growth will outweigh inflation concerns, making further cuts likely.
🔹 U.S. Fed moves could play a role: While the U.S. Federal Reserve has held steady, it is expected to cut rates later in the year — a move that could ease pressure on the Canadian dollar and give the BoC more room to act.

Despite today’s hold, the overall trend for 2025 could still lean toward lower borrowing costs if global conditions continue to deteriorate.