As of now, some of the best rates on 5-year fixed mortgages are already as low as 3.90%, with 3-year fixed rates available in the 3.89%–3.99% range. These rates reflect significant improvements compared to earlier in the year, highlighting how the market is already pricing in expected rate cuts from the Bank of Canada.
So, what does this mean for potential future fixed rate decreases? Here’s a quick breakdown:
Fixed Rate Projections vs. Current Offers
The current fixed rates are already aligning closely with the anticipated long-term normalization of rates in the high 3% range. This suggests that bond markets (which heavily influence fixed mortgage rates) are pricing in future cuts, and rates have likely reached or are near their bottom.
If the Bank of Canada proceeds with its projected 1.5% in rate cuts over the next year, fixed rates could see minor additional decreases. However, any further drop is likely to be modest—potentially landing fixed rates firmly in the 3.65%–3.89% range for the lowest offers.
The Case for Locking in Now
Given the limited room for further fixed-rate reductions, locking in a 3.90% 5-year fixed rate today could be a savvy move for borrowers who prioritize stability. It offers a low rate while protecting against potential risks, like inflation creeping back up or rate cuts not proceeding as anticipated.
Why Current Fixed Rates Reflect the Best Opportunity
If you’re considering fixed vs. variable, the current low fixed rates have already accounted for much of the expected Bank of Canada rate cuts. While variable rates may eventually drop below fixed rates in the coming year, the difference may not be significant enough to justify the risk, especially if unexpected factors (like economic shocks or a resurgence in inflation) disrupt the projections.
For borrowers comfortable with a slightly higher starting rate, variable mortgages might still offer savings over time. But if you’re seeking peace of mind and consistency, locking in today’s fixed rates might be your best bet.
What Does This Mean for You?
Lower rates are good news for homebuyers and those looking to renew or refinance. But should you go with a fixed or variable rate? Here’s how to decide:
Variable Rate: A Flexible Option with Savings Potential
- Why It Could Work: If the Bank of Canada keeps cutting rates, your monthly payments will drop almost immediately. Historically, variable rates have saved homeowners money 80% of the time.
- The Risk: If inflation spikes again, rate cuts could stall, leaving you paying more in the short term.
Fixed Rate: Lock It In for Peace of Mind
- Why It Could Work: Fixed rates in the low 4% range are already pricing in expected rate cuts, offering stability and predictability.
- The Risk: If rates drop faster than expected, you could miss out on savings.
Shorter Fixed Terms: Worth Considering?
Three-year fixed rates are popular because they offer some flexibility if rates fall further. However, shorter terms like one- or two-year fixed rates are often priced higher than five-year terms, which limits their value.
For most, locking in a three- to five-year fixed rate in the high 3% to low 4% range provides a good balance of savings and security.
What’s Next for Rates in 2025?
Financial markets are currently forecasting a Bank of Canada rate of 2.5% by late 2025, which would bring:
- Fixed rates around 3.65% to 3.89%.
- Variable rates in the 3.3% to 3.70% range.
This assumes inflation stays under control. If inflation creeps back up, rates could rebound—but for now, the trajectory looks promising for lower rates ahead.
Key Takeaways
- Lock in Savings: If you’re in the market for a mortgage, compare variable and fixed rates to see what suits your risk tolerance.
- Consider Overpaying: If you choose a variable rate, keep your payments steady as rates drop. This reduces your principal faster and shields you from future rate hikes.
- Stay Informed: Mortgage rates can change quickly. Following updates and working with an experienced mortgage broker ensures you’re always in the best position.
- Consider Minor Changes in Fixed Rates: While we expect fixed rates to drop further, this may be a miniscule amount compared to where rates are today.
- Anything Can Happen: Remember; projections can change over time. While my current speculative assessment is based off todays’ variables, this may be different in 6 months if the markets change.
