How the U.S. Economy Is Impacting Canadian Mortgage Rates

Despite strong expectations for the Bank of Canada to start cutting rates this summer, posted fixed mortgages from the big lenders have remained sticky — here’s why.

By Josh Sherman | 3 minute read

The Bank of Canada has maintained its influential overnight rate at 5% since July 2023, yet some advertised fixed-rate mortgages have been getting more costly of late.

If you’ve been shopping around for mortgages recently, you may have noticed that some fixed rates reportedly increased earlier this month. 

With many expecting that the Bank of Canada will begin trimming interest rates this summer, the fact that some posted mortgages were creeping higher might have left some consumers scratching their heads. The main culprit behind the sticky rates is the surprisingly resilient economy down south, suggests Jason Friesen, managing partner and mortgage agent at Outline Financial. “This has nothing to do with the Canadian economy,” Friesen tells Wahi.

So what does the U.S. economy have to do with fixed-rate mortgages in Canada?

While variable rates respond to the Bank of Canada’s overnight rate, fixed rates are loosely tied to the bond market, which is sensitive to the American and domestic economies. “Bond yields are, in the easiest terms, basically a forward expectation of where the central banks are headed from a rate perspective and the economy as a whole,” Friesen explains.

Policymakers at the Bank of Canada and the U.S. Federal Reserve often act more or less in tandem on rate moves — but not always.

So while many market-watchers are pricing in a Bank of Canada cut at some point this summer — with the next scheduled rate announcement, in June, looking increasingly like a toss-up — the outlook in the states suggests U.S. rates will remain higher for longer.  “What we’ve witnessed over the last two months is with all this positive news coming out of the U.S., it continues to drive yields up, and therefore put upward pressure on fixed rates,” he adds. (Essentially, bond yields and fixed-rate mortgages are tied together because banks use the former to fund the latter; changes to the five-year bond yield, for example, are reflected in posted five-year fixed mortgage rates, and so on.) 

Canadians Choose Shorter Mortgage Terms Due to Heightened Bond Yields

Currently, Canadian borrowers can obtain variable rates around 6.2%, not accounting for the loan size or other factors, Friesen ballparks. A three-year fixed rate is around 5.29%, he adds, while a five-year fixed rate is about 5%. Despite the discount that comes with a longer term, “most clients are opting for a medium-term fixed,” says Friesen. He estimates that three-quarters of his clients are going with the three-year fixed rate. The medium-term option is popular today, he suggests, because if interest rates begin falling rapidly, the borrower won’t have to wait as long to renegotiate their mortgage — even if the five-year term, traditionally the most popular, is the better deal on signing.

According to Friesen, it’s not just stubbornly higher fixed rates that are costing borrowers more right now. Lenders are unwilling to offer the discretionary rate deals they were in the past. These rates, which are below what’s advertised, are based on mortgage size, closing date, and the client’s relationship with the lender. Friesen says such discounts were common a couple of years ago but not any longer: “What we’re seeing now is… that additional discounting is not there at all — it’s non-existent.”