After a Bank of Canada rate cut, I hear the same questions over and over: “Will this change my mortgage rate?” and “Since my mortgage is already approved, will my rate go down?”
Grab your coffee — we’re going to break down how rate cuts, bond yields, and mortgages all connect. The simple answer? It depends on whether you have a variable or a fixed mortgage.
Variable Rates: Quick Changes
If your mortgage is variable or you use a line of credit, a rate cut from the Bank of Canada can have an almost immediate effect.
Here’s why:
- The Bank of Canada sets the overnight rate, which is the interest rate banks charge each other for very short-term loans.
- From there, banks set their prime rate, which is the base for variable mortgages, HELOCs, and some personal loans.
- Your variable mortgage is tied to that prime rate.
So when the Bank cuts rates, your monthly payment may drop, or more of your payment could go toward principal instead of interest. If rates rise, borrowing costs increase right away.
Fixed Rates: A Different Story
Fixed-rate mortgages don’t react directly to the Bank of Canada’s announcement. Instead, they follow the Government of Canada bond market, especially the 5-year bond yield for a 5-year mortgage term. (A bond yield is basically the return an investor earns by holding a government bond.)
Why this matters:
- Fixed-rate mortgages lock in your borrowing cost for a set period.
- Lenders use bond yields as a benchmark to price mortgages and manage their risk.
- The difference between bond yields and mortgage rates — called the spread — ensures lenders cover costs and make a profit.
How Bond Yields Influence Fixed Rates
The bond market looks ahead. Investors are constantly predicting where the economy and the Bank of Canada are headed.
- If investors expect inflation to remain high, bond yields rise, which pushes fixed mortgage rates up.
- If investors expect inflation to cool and further rate cuts, bond yields drop, often leading to lower fixed rates.
This is why fixed rates sometimes move before a Bank of Canada announcement — the market has already “priced in” expectations.
It also explains why fixed rates don’t always drop immediately after a rate cut. Lenders adjust based on bond yields and their funding costs, not the overnight rate, so any changes may take time to appear.
Timing and How Lenders Decide
Even when bond yields shift, lenders don’t always adjust posted rates immediately. They monitor trends, funding costs, and competitor pricing.
Banks also tend to raise fixed rates faster than they lower them, a strategy to protect themselves from sudden market swings.
So if fixed rates didn’t drop right after the Bank’s announcement, it doesn’t mean nothing is happening — the adjustment may just take a few days or even weeks.
Why Fixed Rates Are Higher Than Bond Yields
Fixed mortgages carry more risk and cost more for lenders than government bonds. That’s why fixed rates are set higher — the spread covers the extra risk and operating costs.
The spread isn’t always constant. Economic conditions, expected loan defaults, and competition among lenders can all cause it to widen or shrink. Each bank decides individually how low it can go to attract borrowers.
What This Means Going Forward
Key takeaways:
- Variable rates respond quickly to Bank of Canada changes.
- Fixed rates follow bond yields, which reflect market expectations for the future.
Rate cuts can signal an environment where borrowing costs may trend lower. While fixed rates don’t drop instantly, the stage is often set for lower rates in the months ahead.
Bringing It Back to You
Even if your rate hasn’t changed yet, the Bank of Canada’s decision affects where rates are headed.
If you’re:
- Thinking about buying soon
- Trying to choose between fixed or variable
- Approaching a renewal
- Considering refinancing
…it’s worth having a conversation (Hi! I’m here to help!) about how bond market trends and BoC decisions might affect your situation.
Many people also ask: “Which is better — fixed or variable?” My answer: there’s no one-size-fits-all solution. Mortgage rates move for many reasons — some obvious, some behind the scenes. Stay informed, ask questions, and trust your gut. Choose what feels right for you.