Bank of Canada decision means shifting equation on fixed vs. variable mortgage rates

A tradesperson moves a ladder while working on a balcony at a condo tower under construction, in Burnaby, B.C., on Wednesday, March 2, 2022. THE CANADIAN PRESS/Darryl Dyck

TORONTO -- The Bank of Canada’s decision to lower interest rates for the first time since March will have a direct effect on variable mortgages, and could shift the equation on whether to go with a fixed or variable rate.

Penelope Graham, mortgage expert at Ratehub.ca, says if lenders do pass on the full 0.25 percentage point cut, it will mean the lowest variable rates for a five-year term should go from 3.95 per cent to 3.70 per cent, compared with 3.94 per cent for the lowest fixed rate.

“So we’ve got a spread of 24 basis points there, which is not huge, but you know, it is significant,” she said.

“For somebody who is attracted by a variable rates, there’s also the growing narrative that we might see more rate cuts to come this fall.”

She cautions, however, that a decision between fixed and variable is really dependent on risk tolerance.

“We’ve got plenty of precedents that shows that variable rates can trend back up just as quickly as they drop, if not faster, and we still have a lot of headwinds that could put the boil under inflation.”

In lowering the Bank of Canada’s policy rate to 2.5 per cent, Governor Tiff Macklem said the risks have shifted since July, including a worsening labour market and sharp drop in exports.

“With a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate,” he said in prepared remarks.

The worsening outlook, including a notably weak jobs report on Sept. 5, has also put downward pressure on the bond yields that determine fixed rates.

Bond yields will likely be further influenced by the U.S. Federal Reserve that’s set to release its own rate decision Wednesday afternoon, said Graham.

“If their commentary is quite dovish, then we could see yields fall further, and then we’ll start to see some additional fixed rate cuts.”

Macklem gave little forward guidance on further rate decisions, leaving CIBC to expect another 0.25 percentage point cut in October, said CIBC senior economist Andrew Grantham in a note.

“While little guidance was given as to if and when further interest rate cuts will be needed, in our view the economy is losing resilience and inflation will continue to be contained by the elevated unemployment rate and removal of retaliatory tariffs.”

Though the outlook on rates is unclear, those with variable mortgages are expected to see a swift change to their rates from the latest Bank of Canada decision. Someone with an average priced home could see $84 per month in savings if the variable rate on their $624,277 mortgage goes from 3.95 per cent to 3.70 per cent, said Ratehub.

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Ian Bickis, The Canadian Press

This report by The Canadian Press was first published Sept. 17, 2025.