As signs point to more Bank of Canada rate cuts ahead, buyers are turning their back on fixed rates
Canada’s national housing agency confirmed last week what most mortgage market watchers already suspected: variable-rate options are now the most popular mortgage type across the country, surpassing fixed-rate products after a flurry of Bank of Canada rate cuts last year.
Forty-two percent (42%) of new mortgages were on a variable rate by February, Canada Mortgage and Housing Corporation (CMHC) revealed in its latest residential mortgage industry report, thanks to a shrinking premium for those mortgage types.
That marks a sharp contrast to 2022 and 2023, when a series of central bank rate hikes saw borrowers flock away from variable options, which are closely linked to the Bank of Canada’s benchmark rate.
But a run of seven straight rate cuts by the Bank last year into early 2025, and the expectation of further reductions down the line, appear to have restored borrower confidence in variable rates.
Meanwhile, five-year Government of Canada bond yields, the main influence behind fixed mortgage rates, have been on an unsteady and unpredictable path throughout the year to date – and few are convinced they’ll tumble anytime soon.
Canada’s residential mortgage market faces growing risk in a turbulent economy, according to CMHC's latest report. CMHC states the overall economic outlook remains the "biggest source of risk" due to unemployment's impact on mortgage defaults.https://t.co/YUC5IcPj2k
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 12, 2025
“Bond yields have been creeping up,” Justin Prasad (pictured top), financial advisor at BlueShore Financial, a division of Beem Credit Union, told Canadian Mortgage Professional. “Mortgage rates [have increased] a couple of times over the last three weeks, four weeks. I think people are now probably looking at it like, ‘OK, this is the playing field.’"
The Bank of Canada has held rates unchanged in its last two meetings amid an uncertain outlook for the global economy, with the trade war unleashed by US president Donald Trump earlier this year posing risks to Canadian jobs but also putting upside pressure on inflation.
Bank of Canada set to continue cutting
The possibility of a further economic contraction thanks to the ongoing tariff turmoil means markets are expecting the central bank to begin cutting again soon – potentially in September.
By contrast, there’s no guarantee that fixed rates will be on the way down before the end of the year. “We’re hoping to see another 50 basis points in [Bank of Canada] cuts this year,” Prasad said. “Are bond yields going to be where they’re at in six months? I’d say there’s a good chance of that.
“So that means the five-year’s probably going to be just slightly above 4%. I think people would probably be looking at the variable, knowing that rates are not going to go higher and thinking, ‘Hey, if I’m in a variable, there might be an opportunity to move to a fixed at some point.’ So if rates go even lower, the variable seems like a better play at this point.”
Lower variable rates down the line a better bet for borrowers
The mortgage and housing outlooks are currently clouded by uncertainty and a lack of clarity over the economy’s future, with the US and Canada reportedly making progress in trade talks but seeming some way off a deal.
Gloomy forecasts for the economy and labour market have included a warning that Canada could shed 100,000 jobs because of the Trump tariffs, dampening much of the enthusiasm that marked the beginning of this year.
The chance of a weaker economy by the end of the year is also giving plenty of borrowers pause for thought as they weigh up homebuying prospects in the current market, according to Prasad.
“I think people came out of 2024 bullish about things, and now people are getting mixed signals,” he said. “You see it [reflected] in the Bank of Canada, you see it from my clients. I’m hoping that as we get through summer and head into the fall, we’ll have a clearer picture where things lie, whether this China-US trade deal gets done and we have a clearer direction of where the Bank of Canada is going to head.
“But at this time, I feel like there’s a lot of noise out there and unfortunately, it’s probably going to continue like that over the next couple of months. But it will get better.”
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