Fixed mortgage rates have fallen below variable mortgage rates in Canada

By: Jessica Mach on June 7, 2019

Homebuying season is in full swing and the market is doing something it hasn’t in a while: offer better deals for fixed-rate mortgages than for variable rate mortgages.

As of Friday, buyers can find five-year fixed rates as low as 2.64% on LowestRates.ca. Experts had been predicting lower mortgage rates this summer, but this is on the low range of those predictions. For instance, Shawn Stillman, director at Mortgage Outlet Inc., said back in March that fixed rates would likely hover around 2.99% by late spring.

Because fixed rates don’t change over the length of the mortgage, they are traditionally higher than variable rates, which can change over the course of the loan depending on how interest rates shift. However, data from LowestRates.ca shows that the best variable mortgage rate on the market right now is one basis point higher than the lowest fixed rate: 2.65%. 

Why is this happening?

The market is pricing in that the Bank of Canada will cut interest rates this year, but the Bank of Canada has not done so nor is it suggesting that it will. That leaves a disconnect in the market.

In the case of fixed mortgage rates, we need to look at what’s been happening to bond yields to understand why rates have fallen. To calculate how much interest they’ll charge customers for fixed-rate loans, lenders look at how much it costs for themselves to borrow money via the bond market. When lenders can borrow money at low rates, they’ll typically carry those savings over to their own customers by slashing their fixed rates.

And right now, it’s cheap for lenders to borrow. The yield on a five-year Government of Canada bond dropped below 1.3% this month — the continuation of a steady downward trend that started last fall as the market began to increasingly fear an approaching recession in Canada. The yield hasn’t dipped this low since June of 2017.

Variable rates, on the other hand, are calculated based on the overnight interest rate set by the Bank of Canada (BoC), the country’s central bank. After a series of hikes in 2018, the bank set its overnight rate at 1.75% in October, and hasn’t moved it since.

As talk of a possible recession began to grow louder, based on a slowed economy, uncertainty around trade conflicts, low oil prices and sluggish consumer spending, economists started to shift their predictions about the BoC’s next move, which is now widely expected to entail either a rate cut or no rate changes for the rest of the year.

Still, the low rates are good news for homebuyers, especially as many continue to struggle with high home prices and the mortgage stress test.