By Leanne Mollica
Mortgage Broker | Mortgage Architects – Team Borle
Founder, My Mortgage Strategy
Serving Salmon Arm, the Shuswap, and British Columbia
Every Bank of Canada announcement day, my social media feed and email inbox fill up with predictions about what interest rates are going to do next.
And every time, I get some version of the same questions:
“Should I wait to buy until after the announcement?”
“If the Bank of Canada cuts rates, will mortgage rates go down?”
“Should I lock something in now?”
They are completely reasonable questions.
The problem is that mortgage rates are rarely as simple as Bank of Canada cuts = all mortgage rates go down.
Understanding the difference between variable and fixed mortgage rates — and what actually influences each of them — can make these announcement days a lot less confusing.
What Does the Bank of Canada Actually Set?
Let’s start with one of the biggest misconceptions.
The Bank of Canada does not set your mortgage rate.
The Bank sets something called the target for the overnight rate, also commonly referred to as the policy interest rate.
This rate influences the cost of borrowing throughout the Canadian economy. When the Bank raises or lowers it, financial institutions will often adjust their prime lending rates in response.
And that’s where the connection to your mortgage begins.
Variable Mortgage Rates: The More Direct Connection
If you have a variable-rate mortgage, the Bank of Canada announcement matters much more directly.
Variable mortgage rates are generally priced in relation to a lender’s prime rate.
You might see a mortgage described as something like:
Prime – 0.75%
or
Prime + 0.25%
The discount or premium in your mortgage contract generally stays the same, but the lender’s prime rate can change.
So when the Bank of Canada changes its policy rate and your lender changes prime accordingly, the interest rate on your variable mortgage changes too.
What happens to your actual payment will depend on the type of variable mortgage you have. With some mortgages, the payment changes as rates change. With others, the payment may initially stay the same while the amount going toward principal versus interest changes.
Fixed Mortgage Rates Work Differently
This is where announcement-day headlines can get confusing.
Fixed mortgage rates don’t simply follow the Bank of Canada’s overnight rate.
Fixed rates are influenced much more by the bond market and by lenders’ cost of obtaining the money they lend to mortgage borrowers.
For example, five-year Government of Canada bond yields are an important influence on five-year fixed mortgage pricing.
Those bond yields move based on what financial markets expect to happen in the future — including expectations around inflation, economic growth and future Bank of Canada decisions.
That means fixed mortgage rates can move before the Bank of Canada ever makes an announcement.
How Can the Bank Cut Rates While Fixed Mortgage Rates Go Up?
It sounds backwards, but it can happen.
Imagine markets are already expecting the Bank of Canada to cut its policy rate by 0.25%.
Investors have had weeks to anticipate it.
By the time announcement day arrives, that expected cut may already be reflected in bond prices and yields.
Then the Bank announces exactly what everyone expected.
There may be very little reason for fixed mortgage rates to move at all.
Or perhaps the Bank cuts its overnight rate but, at the same time, markets become more concerned about future inflation or believe rates will eventually need to be higher.
Bond yields could rise.
And fixed mortgage rates could potentially rise with them.
That’s why simply reading “Bank of Canada cuts rates” doesn’t tell you everything you need to know about what’s happening with mortgage rates.
What If the Bank of Canada Holds?
The same principle applies when the Bank leaves its policy rate unchanged.
A Bank of Canada hold does not mean mortgage rates are frozen until the next announcement.
Variable rates may remain unchanged if prime doesn’t move.
But fixed mortgage rates can still change because the bond market continues trading every day.
Economic reports come out.
Inflation expectations change.
Employment numbers change.
Global events affect financial markets.
Investors change their expectations about where interest rates are heading next.
Lenders also adjust their own pricing based on funding costs, competition and the types of mortgages they want on their books.
There is a lot happening between Bank of Canada announcement days.
Why “Waiting for the Next Announcement” Can Backfire
One of the biggest mistakes I see borrowers make is putting their plans on hold while waiting for the “perfect” rate.
Maybe the Bank of Canada is announcing next week.
Maybe economists are predicting another cut in a few months.
Maybe someone on the news thinks fixed rates are about to drop.
So you wait.
Sometimes that works in your favour.
Sometimes it doesn’t.
Because while you’re waiting for one piece of the puzzle to change, other pieces can change too.
The home you want may sell.
Property values may change.
Your income or employment situation may change.
Lender qualification guidelines can change.
Bond yields can move in the opposite direction you expected.
Or the market may have already priced in the announcement you were waiting for.
Trying to perfectly time an interest rate is a little like trying to perfectly time the stock market.
You might get it right.
But I wouldn’t build your entire mortgage strategy around the assumption that you will.
Should I Choose Fixed or Variable Based on What the Bank of Canada Is Expected to Do?
Not by itself.
Where rates may be headed is certainly part of the conversation, but it shouldn’t be the whole conversation.
I would rather know:
Are you comfortable with your payment changing?
How tight is your monthly budget?
How long do you expect to own this home?
Could you move before the end of your mortgage term?
Are you planning a major life change?
How important is payment certainty to you?
Would fluctuating rates cause you significant stress even if you could technically afford them?
Do you want flexibility to make changes to your mortgage?
Those answers can matter much more than someone’s prediction about where rates will be six months from now.
What About Buying a Home?
If you’re waiting to buy solely because you’re hoping for a lower mortgage rate, remember that the mortgage rate is only one part of the equation.
Your purchase price, down payment, income, debts, property taxes, condo fees where applicable, mortgage insurance and the type of mortgage you choose all contribute to the numbers.
A slightly lower rate doesn’t automatically make a property affordable.
And a slightly higher rate doesn’t automatically mean buying is a bad decision.
The question I would rather answer is:
Does buying this particular home, at this particular price, with this particular mortgage, comfortably fit your financial situation?
That’s a much more useful question than trying to predict the next Bank of Canada decision.
What About Renewals and Refinances?
The same thinking applies if your mortgage is approaching renewal.
Don’t wait for a Bank of Canada announcement to start looking at your options.
Starting early gives us time to compare your existing lender’s offer against other options, look at your current financial situation and decide whether the structure of your mortgage still makes sense.
And if you’re considering refinancing, there are even more factors to consider.
A refinance is a new mortgage application. Your current income, credit, debts, property value, available equity and qualifying rate all matter.
Waiting for a slightly lower rate isn’t necessarily helpful if something else changes that makes it more difficult for you to qualify.
Don’t Build Your Mortgage Around a Headline
Bank of Canada announcements matter.
I pay attention to them. I watch bond yields. I follow inflation, employment data and the economic outlook because all of those things help me understand what’s happening in the mortgage market.
But I don’t believe your mortgage strategy should be based on trying to predict one announcement.
It should be based on:
Your goals.
Your timeline.
Your budget.
Your tolerance for risk.
Your plans for the next few years.
And the mortgage options actually available to you.
The best time to buy, refinance or renew isn’t necessarily when the headlines tell you to.
It’s when the numbers make sense for your situation.
The Bank of Canada makes decisions for the entire country.
Your mortgage strategy should be built for your household.
If you’re watching the next Bank of Canada announcement and wondering what it means for your mortgage, your renewal or your plans to buy, reach out.
I’ll help you separate what actually affects your mortgage from the noise surrounding announcement day.