If you’ve been keeping an eye on mortgage rates lately, you might be thinking about holding off on a fixed-rate mortgage until the Bank of Canada’s next announcement on October 23rd. After all, the Bank of Canada sets the overnight rate, which influences interest rates in general, right? Well, not exactly—especially when it comes to fixed mortgage rates.
Let’s clear up how mortgage rates actually work and why it might not be worth the wait.
How Fixed Rates Actually Move
Fixed mortgage rates are mostly determined by bond yields, not the overnight rate set by the Bank of Canada. When we talk about bond yields, we’re referring to the return investors earn on government bonds, which are typically considered very safe investments. When bond yields go up, fixed mortgage rates tend to rise as well, and when yields drop, fixed rates can come down.
So why do fixed rates follow bond yields? It’s mainly because banks use bonds as a way to balance their own lending risks. When the return on bonds goes up, the cost of borrowing for banks increases too, which gets passed along to you in the form of higher fixed mortgage rates. If bond yields decrease, banks can afford to offer lower fixed rates.
The Role of the Bank of Canada’s Overnight Rate
The overnight rate is a different animal altogether. It directly affects variable mortgage rates, not fixed ones. When the Bank of Canada changes the overnight rate, it changes the cost for banks to borrow money from each other on a very short-term basis.
When the overnight rate goes up, the prime rate (which variable mortgages are based on) also rises, making variable-rate mortgages more expensive. Conversely, when the overnight rate is cut, the prime rate usually drops, bringing variable mortgage rates down.
Is There a Correlation Between Fixed and Variable Rates?
There is some indirect correlation, but it’s not as straightforward as you might think. When the Bank of Canada hikes the overnight rate, it can signal that inflation is a concern, leading to higher bond yields as investors expect higher returns to offset inflation risks. This can push fixed rates up alongside variable rates.
On the flip side, if the Bank of Canada decides to cut the overnight rate in response to economic weakness, bond yields might also drop, potentially leading to lower fixed rates. However, it’s important to note that fixed rates don’t always move in lockstep with the overnight rate. Sometimes, bond yields move for reasons completely unrelated to what the Bank of Canada is doing. For example, global economic factors, investor sentiment, or market volatility can all impact bond yields independently.
Should You Wait Until October 23rd?
If you’re thinking about locking in a fixed rate, don’t assume that the Bank of Canada’s next announcement will bring any significant change. It’s true that if the central bank makes an unexpected move with the overnight rate, bond yields might react, potentially affecting fixed rates. But if you’re hoping for a drop in fixed rates following a potential cut in the overnight rate, it’s not guaranteed.
Market conditions, investor expectations, and other global economic factors play a bigger role in influencing fixed mortgage rates than the Bank of Canada’s overnight rate ever will. If bond yields stay high, fixed rates are likely to stay high too, even if the overnight rate gets cut.
Key Takeaways
Fixed Rates Follow Bond Yields, Not the Overnight Rate: Unlike variable rates, which are directly affected by the Bank of Canada’s overnight rate, fixed mortgage rates are driven by bond yields. When bond yields rise, so do fixed rates, and when yields fall, fixed rates can decrease.
The Bank of Canada’s Impact Is Indirect at Best: While changes to the overnight rate can signal economic conditions that influence bond yields, fixed rates don’t always move in line with the central bank’s decisions. Factors like global market trends and investor behavior play a larger role.
Don’t Assume Fixed Rates Will Drop After October 23rd: Even if the Bank of Canada cuts the overnight rate, it doesn’t guarantee a decrease in fixed mortgage rates. Bond yields would need to drop significantly for that to happen.
Timing Matters, But Waiting May Not Pay Off: If you’re ready to lock in a fixed rate, it’s wise to consider today’s market conditions rather than waiting for the next Bank of Canada announcement. Current insured mortgage rates are at 3.94% for a 5-year term and 3.99-4.09% for a 3-year term, while the best variable rate sits at 5.35% for a 5-year term.
Consult a Mortgage Broker for Guidance: To make an informed decision, stay in touch with a mortgage broker who can keep you updated on bond yield trends and market conditions, helping you secure the best rate for your situation.
In short, while the October 23rd announcement is important for variable rates, bond yields are what truly matter for fixed-rate mortgages. Make your decision based on the market, not just the date on the calendar. If you have questions or need personalized advice, I’m here to help!
