Homebuyers Return to Variable-Rate Mortgages Despite Warnings of Possible Rate Increases
For months now, the conversation around interest rates has focused on how low they will go and when we’ll get there.
On Wednesday, Bank of Canada Governor Tiff Macklem seemed to answer those questions when he suggested that the bank’s easing cycle may be done for the foreseeable future if the economy grows as expected.
A rate cut in September and the one Mr. Macklem announced Wednesday, bringing the central bank’s policy rate down to 2.25 per cent, have partly driven rising interest in variable-rate mortgages. Data from Rates.ca show that inquiries about variable-rate mortgages accounted for 28 per cent of all searches in October, up from 18 per cent in July and a two-year low of 10 per cent in June, 2023, when interest rates were peaking.
The September rate cut had made five-year variable rates just a few basis points cheaper than five-year fixed rates, and economists posited that more cuts were on the way in the short term.
But economists, financial experts and markets are already considering the possibility of interest rates rising again – maybe as soon as mid-2026.
Predicting where rates will go in the long run is difficult at the best of times, but especially so right now, when the Canadian economy is at the whim of a highly unpredictable U.S. president. However, future inflation reports, Canada’s trade relationship with the U.S. and bond yields could offer some clues to where rates will go.
Derek Holt, vice-president and head of capital markets economics at Scotiabank, is among those who believe the central bank could deliver two rate hikes in the latter half of 2026.
He says the current headline rate of 2.25 per cent is on the low end of what the Bank of Canada would consider the neutral rate, which is estimated to be between 2.25 per cent and 3.25 per cent.
“They’re leaning toward providing stimulus, which over time the economy may not need as it deals with various shocks,” Mr. Holt said.
“You would expect to see some sort of normalization to somewhere at least in the middle of that range.”
Variable-rate mortgages always come with the risk that they could become more expensive. That’s why they’re often cheaper than fixed-rate mortgages: The bank is off-loading some of that volatility and risk onto the consumer.
As a result, variable-rate mortgages are only recommended for people who have the ability to withstand multiple rate increases. Depending on the kind of mortgage you have, a rate hike may not increase your payments right away, but it could affect your amortization and cost you more in interest.
Victor Tran, a mortgage broker and spokesperson for Rates.ca, said the vast majority of his clients go with a fixed rate for the peace of mind.
“There’s so much uncertainty in the market. That’s why people are picking fixed rates right now,” Mr. Tran said.
Still, he said, he would personally pick a variable-rate mortgage because he’s comfortable with the potential of long-term gains and short-term pain.
He said an added benefit is that you can generally lock into a fixed rate with the same provider without any penalties.
If mortgage shoppers are thinking about timing the market and switching their variable-rate mortgage to a fixed one, Mr. Tran recommends watching the Canada five-year bond yield, which is one of the biggest drivers of fixed mortgage rates.
That bond’s yield has been hovering around 2.6 per cent, but significant moves closer to 3 per cent could imply that either interest rates or fixed mortgage rates are about to go up. After Wednesday’s Bank of Canada announcement, yields rose to roughly 2.7 per cent.
Bank of Montreal chief economist Doug Porter said Canada’s trade relationship with the U.S. is one of the main variables.
An improvement or a trade deal could imply that the economy will improve and that low interest rates are no longer needed.
But Mr. Porter said his bank considers it unlikely the economy will improve that quickly and expects interest rates to remain low throughout 2026.
“The trade uncertainty is not going to dissipate, and we’re probably in the early innings of the actual economic impact of the tariffs,” he said.
Mr. Holt said inflation could be another factor that forces the central bank to hike rates.
For people who are trying to figure out the best time to lock in to a fixed rate, Mr. Holt suggests we may be seeing the lowest fixed-rate mortgages right now, since the Canada five-year bond yield has approached the 2.5-per-cent mark at points and the Bank of Canada has signalled it may stop cutting rates.
“Something in and around 2.5 per cent for the five-year Canada bond is pretty darn low,” he said.
“That might suggest that, over time, as eventually conditions improve in the next one or two years, that we’ll look back in retrospect and see those yields and the five-year fixed mortgage rate as being relatively cheap.”
This article was first reported by The Globe and Mail
