Understanding Fixed vs. Variable Mortgage Rates in Ontario

Mar 4

With the next Bank of Canada announcement coming up, many Canadians are expecting another 0.25% rate decrease. While this is great news for borrowers, many people still feel uncertain about what this means for their mortgage decisions. Whether you're considering buying a home, renewing your mortgage, or refinancing, understanding how mortgage rates work can help you make informed choices.

The two main types of mortgage rates in Canada are fixed rates and variable rates. Each has its own advantages, risks, and best-use scenarios depending on your financial situation, market trends, and risk tolerance. Let’s break it all down so you can confidently decide which option works best for you.

Fixed Mortgage Rates in Ontario

A fixed mortgage rate means your interest rate stays the same for your entire term, which is typically between 1 to 5 years. This means your monthly payment amount will never change, offering predictability and stability.

How Fixed Mortgage Rates Are Determined

Unlike variable mortgage rates, which are directly influenced by the Bank of Canada’s policy rate, fixed mortgage rates follow the 5-year Government of Canada bond yields. Bond yields fluctuate based on multiple factors:

1. Government of Canada Bond Yields

Lenders use the interest rate of 5-year government bonds as a benchmark for pricing their fixed mortgage rates.
When bond yields go up, fixed mortgage rates go up.
When bond yields go down, fixed mortgage rates go down.

2. Inflation

If inflation is high, bond yields rise, leading to higher fixed mortgage rates.
If inflation is low, bond yields fall, leading to lower fixed mortgage rates.
The Bank of Canada raises interest rates to control inflation, indirectly pushing bond yields higher and increasing fixed mortgage rates.

3. Economic Conditions

A strong economy (high employment, rising wages, GDP growth) increases inflation risks, causing bond yields and fixed mortgage rates to rise.
A weak economy (high unemployment, low consumer spending) decreases inflation risks, leading to lower bond yields and fixed mortgage rates.

4. Global Events & Market Uncertainty

Stock market downturns, global conflicts, and financial crises can drive investors to buy more government bonds as a safe investment.
When demand for bonds increases, bond yields decrease, which can lower fixed mortgage rates.

5. Lender Competition & Profit Margins

Lenders adjust their fixed rates based on competition and business strategy.
When lenders want to attract more borrowers, they may lower fixed mortgage rates even if bond yields stay the same.

Pros of a Fixed-Rate Mortgage

✔ Predictable payments for easier budgeting.

✔ Protection from rising interest rates.

✔ Good for long-term financial stability.

Cons of a Fixed-Rate Mortgage

✘ Higher initial interest rates compared to variable rates.

✘ Higher penalties if you need to break your mortgage early.

✘ Less flexibility if interest rates drop during your term.

Variable Mortgage Rates in Ontario

A variable mortgage rate changes over time based on the Bank of Canada’s policy interest rate. Your lender will adjust your interest rate in response to BoC rate movements, which means your mortgage payment could increase or decrease during your term.

How Variable Mortgage Rates Are Determined

Variable rates move in sync with the Bank of Canada’s overnight rate, which is influenced by:

1. Bank of Canada Interest Rate Decisions

When the Bank of Canada raises its rate, variable mortgage rates increase.
When the Bank of Canada lowers its rate, variable mortgage rates decrease.

2. Economic Conditions & Inflation

High inflation often leads the Bank of Canada to raise interest rates to slow down the economy.
A slowing economy, recession, or lower inflation may lead to rate cuts, benefiting variable-rate mortgage holders.

3. Lender Prime Rates

Most variable-rate mortgages are based on the lender’s prime rate, which is directly tied to the Bank of Canada rate.
Lenders set their own prime rates but usually follow the BoC’s changes.

Pros of a Variable-Rate Mortgage

✔ Lower initial interest rates compared to fixed rates.

✔ Potential savings if rates decrease.

✔ Lower penalties if you break your mortgage early.

✔ Option to lock into a fixed rate at any time.

Cons of a Variable-Rate Mortgage

✘ Uncertainty—your rate can increase unexpectedly.

✘ Higher payments if interest rates rise.

✘ Less stability for long-term budgeting.

Fixed vs. Variable Mortgage Rates: Which One is Right for You?

There’s no one-size-fits-all answer. The right choice depends on your financial goals, risk tolerance, and market conditions.

A Fixed-Rate Mortgage Might Be Best If:

✅ You prefer stability and predictability.

✅ You’re on a tight budget and can’t handle payment fluctuations.

✅ You plan to stay in your home long-term and won’t break your mortgage early.

A Variable-Rate Mortgage Might Be Best If:

✅ You can tolerate some financial risk and potential payment increases.

✅ You believe interest rates will go down in the near future.

✅ You may sell or refinance before the end of your mortgage term and want lower penalties.

✅ You like the flexibility of locking into a fixed rate later if needed.

What’s Happening in Today’s Market?

Currently, the Bank of Canada is expected to decrease rates by 0.25% in the upcoming announcement. This is great news for those with variable-rate mortgages, as their interest payments will likely decrease. However, future changes depend on inflation, economic performance, and global events.

For fixed-rate mortgages, bond yields have been fluctuating based on investor sentiment about inflation and economic stability. If inflation slows and bond yields continue to drop, we may see lower fixed mortgage rates in the near future.

Bottom Line: Should You Choose Fixed or Variable?

Ultimately, the decision comes down to your personal financial situation. If stability and predictable payments are a priority, a fixed-rate mortgage is likely the better choice. However, if you’re comfortable with some uncertainty and want to take advantage of potential savings, a variable-rate mortgage could work in your favour.

If you’re still unsure, I’m happy to discuss your options and help you determine the best fit for your needs. Let’s chat about your mortgage strategy and ensure you’re making the most informed decision possible in today’s market!

📩 Have questions? Reach out anytime—I’d love to help!