Interest rates are dropping, so why aren’t fixed mortgage rates dropping too?

Many Canadian borrowers were relieved to see the Bank of Canada (BoC) begin to cut interest rates in mid-2024, especially those with variable-rate mortgages. However, fixed-rate mortgage rates haven’t dropped at the same pace, leaving some prospective home buyers and existing homeowners wondering why.

Unlike variable rates that generally follow the central bank’s interest rate, fixed rates are based on bond yields, which reflect economic forecasts and investor sentiment, says Daniel Rethazy, senior vice-president of personal lending at CIBC.

“If BoC rate changes align to market expectations, fixed-rate mortgage rates are not likely to move with these changes” he says.

Fixed rates behave much like stock prices, Mr. Rethazy adds. “A stock price already has the expected future performance of a company built into the price. And just as a stock price reflects a company’s expected future performance, fixed mortgage rates factor in where the economy – and borrowing costs – are expected to go,” he says, which is why fixed-rate mortgage prices might not change when the BoC changes its overnight rate.

Put another way: When comparing five-year fixed and variable mortgage rates, the fixed rate is the best “crowd-sourced” guess of what the variable mortgage rate will average over those five years, Mr. Rethazy says.

Market forecasts and messaging plays a role

The BoC’s tone during its policy-rate announcements matters, Mr. Rethazy notes. Even when rates drop, hints of inflation concerns or potential future hikes can push bond yields higher, which in some cases could drive fixed mortgage rates higher.

He explains that fixed mortgage rates started dropping early in 2024, which was well before the BoC started to cut rates. This was because the market had confidence that these rate cuts were coming.

This isn’t new; something similar happened in 2021 when fixed rates went up before the central bank raised rates in 2022. So, when the Bank lowered rates in June 2024, variable-rate mortgages got cheaper, but fixed rates had already adjusted earlier based on those expectations.

Understanding your risk tolerance in a fluctuating rate environment

In a volatile rate environment, many homeowners find deciding between a fixed- or variable-rate mortgage challenging. Mr. Rethazy suggests seeking guidance from a mortgage advisor based on the outlook for interest rates and the individual’s or family’s long-term financial goals.

Homeowners should also understand their risk tolerance for rate fluctuations. For instance, choosing a variable-rate mortgage means that your interest rate may increase with each change from the BoC. Although the BoC is expected to drop rates at least two more times in 2025, any future increases from the BoC could leave you paying more for your mortgage.

Meanwhile, a fixed rate mortgage protects you in case rates increase, but you would not benefit from any future rate cuts from the BoC.

“Regardless of which mortgage option you take, always consider your financial goals first – and the bigger picture. An advisor can also help you understand how recent announcements from the BoC and current economic conditions may impact your decisions.” Mr. Rethazy says.

Wondering whether to opt for a fixed- or variable-rate mortgage in today’s market? Speak to a CIBC mortgage advisor today for expert guidance.

Advertising feature produced by Globe Content Studio with CIBC. The Globe’s editorial department was not involved.