The Bank of Canada recently slashed interest rates by 50 basis points, bringing variable mortgage rates within 46 points of the lowest fixed rates. This latest rate cut marks a significant shift, but with more rate cuts predicted for 2025, many Canadians are wondering: Should you stick with a fixed rate, or gamble on a variable rate?
It’s a bit like Clint Eastwood’s famous line in Dirty Harry: “You’ve got to ask yourself one question: Do I feel lucky?”
What’s Happening with Rates?
The gap between variable and fixed mortgage rates has been shrinking since March, and the bond market is predicting another 100 basis points of rate cuts in 2025. If those predictions come true, we could see nine quarter-point rate cuts since June 2024. That would be great news for anyone on a variable-rate mortgage—lower rates mean lower payments. But if the market’s predictions are off by just a couple of cuts, those projected savings could quickly disappear.
Should You Choose a Variable or Fixed Rate?
Variable rates are often more attractive when the Bank of Canada is cutting rates, and historically, they’ve been a good choice when we’re nearing the bottom of the rate cycle. But there’s always a risk. If the Bank doesn’t cut rates as much as expected or inflation picks back up, your payments could increase. In fact, if the rate cut predictions don’t fully pan out, borrowers with variable rates could find themselves paying more than those who locked in a fixed rate.
That’s why choosing between a fixed and variable rate is a form of risk management. If you prefer stability and predictability, locking in a fixed rate might give you peace of mind. On the other hand, if you’re willing to take on some risk in exchange for potential savings, a variable rate could pay off—especially if the cuts continue as predicted.
What Could Happen Next?
Economists like David Rosenberg predict that rates could drop even further than expected, possibly as low as 2% or even lower, echoing rates from early 2020. However, there are risks on the horizon. Core inflation remains slightly above the Bank of Canada’s target, and factors like job market strength, immigration growth, and potential fiscal stimulus in the U.S. could push rates higher again.
For those who don’t “feel lucky,” locking into a fixed rate—especially a three-year term—might be a safer option to manage the risk of rising rates in the future. In contrast, some homeowners may opt for a hybrid mortgage that blends fixed and variable rates, giving them a bit of security while still benefiting from potential future cuts.
The Big Unknown: U.S. Fiscal Policy
There’s also a larger concern looming over the market: the U.S. government’s massive deficit. If America’s debt problem triggers a crisis in the Treasury market, bond yields could surge. This would push interest rates higher in Canada, potentially putting those on short-term mortgages or renewals in a tough spot a few years down the road.
What Should You Do?
With so much uncertainty, deciding between a fixed or variable mortgage comes down to your comfort level with risk. If you’re more conservative and want to avoid surprises, locking in a fixed rate could be the right choice. If you’re willing to take a gamble and believe rates will continue to fall, a variable rate might be worth the risk—but be prepared for potential increases.