Fixed Mortgage Rates Are Rising: Why, and Should You Consider a Variable Rate?

Are you shopping for a property or approaching your mortgage renewal and noticing that fixed rates are climbing? This can feel surprising, especially when the Bank of Canada's policy rate hasn't changed. The reason lies in an important distinction: fixed and variable rates don't respond to the same economic indicators.

Here's how to understand this increase, compare your options, and choose based on your budget and risk tolerance.

Why are fixed rates rising?

Bond yields drive fixed rates

In Canada, fixed mortgage rates are generally set based on Government of Canada bond yields, particularly the five-year bond for comparable-term fixed loans. Lenders also factor in their funding costs, fees, and loan-related risks. When investors demand higher returns to hold long-term bonds, fixed-rate funding becomes more expensive for lenders, who pass that cost on through the rates offered to borrowers.

Inflation and economic uncertainty

Inflation plays a key role: investors demand higher compensation if they fear the purchasing power of their future payments will erode. Long-term yields also often include a "term premium" — compensation for tying up money for a long period amid uncertainty. Energy costs, trade tensions, and rising government and corporate borrowing can also push bond yields — and therefore fixed rates — higher.

The Bank of Canada influences the market, but doesn't set mortgage rates directly

The policy rate mainly affects short-term rates and influences lenders' prime rate, which serves as the benchmark for variable mortgages. Fixed rates, on the other hand, depend more on the bond market and longer-term funding costs. That's why a Bank of Canada decision doesn't necessarily translate into an immediate move in fixed rates — the two products follow different logics.

Fixed rate vs. variable rate: what's the difference?

Fixed rate: predictable payments

A fixed rate stays the same for the entire term. It's a good fit if you want to know your payments in advance, protect your budget against rising rates, or reduce uncertainty during an important financial period. That stability comes at a cost: fixed rates can be higher than a comparable variable option, and breaking the contract early usually triggers a higher penalty.

Variable rate: potential savings, but more uncertainty

A variable rate fluctuates during the term, usually based on the lender's prime rate. If rates fall, you can benefit; if they rise, your interest cost increases. Depending on the loan structure, payments may adjust or stay fixed while the portion going to interest changes — so it's essential to understand your contract's terms, including the "trigger point" beyond which the lender may require a payment adjustment.

An interesting option to consider is the variable rate with fixed payments. With this type of product, your monthly payment stays stable even if the interest rate fluctuates: it's the portion of the payment allocated to principal and interest that adjusts behind the scenes. You get the flexibility and savings potential of a variable rate while keeping the predictability of a steady payment for your budget. Several financial institutions offer this type of product, including Desjardins, BMO, Manulife, and TD. The exact terms (trigger point, conversion options, etc.) vary from lender to lender, so it's important to compare them carefully before making your choice.

So, should you choose a variable rate?

There's no universal right answer — it depends on your situation:

• Favour a fixed rate if you have a tight budget, little room to absorb a payment increase, or if peace of mind matters most to you.
• Consider a variable rate if you can comfortably absorb fluctuations, have a financial cushion, and are comfortable with uncertainty in exchange for potential savings.
• Explore hybrid options (part fixed, part variable) if you want a compromise between stability and flexibility.
• Always compare breakage penalties and conversion terms before signing, especially if you anticipate a change in your situation (sale, refinancing) during the term.

Fixed and variable rates move according to different market forces, and no one can predict with certainty where rates are headed in the coming months. The best decision is the one that matches your risk tolerance, financial stability, and medium-term plans.

Let's talk about your situation

Every file is unique. I can review your current situation, compare fixed, variable, and hybrid scenarios, and help you choose the option best suited to your goals. Feel free to reach out — together, we'll find the mortgage strategy that works for you.