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.
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