Why Consider Converting Your Variable Mortgage Rate to a Fixed Rate in This Uncertain Economic Environment?
The current economic landscape is marked by significant uncertainties: volatile monetary policy decisions, geopolitical tensions, and persistent inflation concerns. In this context, converting your variable mortgage rate to a fixed rate could be a strategic move. Here’s why:
1. Protection Against Interest Rate Volatility
Variable rates fluctuate based on the Bank of Canada’s (BoC) decisions.
While the BoC has made significant cuts to its policy rate, uncertainty remains regarding the extent of future reductions.
Trade policies under the Trump administration could impact the BoC’s decisions. A trade war would be inflationary for both countries.
If inflation rises again, the BoC may be forced to halt rate cuts and could even substantially increase its policy rate.
2. Limited Room for Fixed Rate Decreases
Government bond yields have already priced in most potential policy rate cuts, limiting further declines in fixed mortgage rates.
There may still be a brief window to secure additional fixed-rate discounts before converting, but trying to "time the market" can be challenging and often leads to the trap of waiting for the "perfect moment."
Locking in a fixed rate now could secure a favourable rate before markets reassess inflation risks and the BoC’s policy rate. Markets typically anticipate BoC rate hikes before they occur, causing fixed mortgage rates to rise ahead of actual policy changes. This pattern was evident between August 2021 and May 2022.
3. Secure Your Budget and Avoid Unexpected Surprises
A fixed-rate mortgage ensures consistent payments, protecting you from potential increases in the BoC’s policy rate.
In a stagflation scenario (low growth + persistent inflation), the cost of living could continue to rise, making stable payments even more valuable. A fixed-rate reduces the risk of higher mortgage costs in the medium term.
4. Prepare for the Future in an Uncertain Market
The Canadian economy is influenced by U.S. monetary policy. If the Federal Reserve maintains a more restrictive approach than the BoC, it could weaken the Canadian dollar and drive inflation higher.
The BoC will eventually have limited room to diverge from the Fed’s policy direction.
If stagflation becomes a reality in 2026, the BoC will face a dilemma: stimulate the economy or combat inflation. However, it will not be able to effectively tackle both issues simultaneously.
A fixed-rate mortgage provides stability during uncertain periods, shielding you from interest rate fluctuations.
A Clear Signal from the Bond Market: The Return of Inflation?
The yield on the U.S. 10-year Treasury bond, a key economic indicator, suggests an imminent return of inflation.
The bond market is sending a clear message: the more the Federal Reserve lowers its policy rate, the more long-term bond yields rise. This reaction reflects the skepticism of "bond vigilantes" (such as Stanley Druckenmiller and Paul Tudor Jones), investors who closely monitor monetary and fiscal policies. They remain unconvinced by Fed Chair Jerome Powell’s assurances that inflation is under control.
Additionally, the U.S. federal government’s growing deficit is prompting investors to demand higher yields for long-term lending. While the Fed can directly influence short-term Treasury yields, it has much less control over long-term bond yields.
Recommendations:
If you are concerned about interest rate trends and want financial stability, converting your variable mortgage rate to a fixed rate could be a wise strategic decision at this time. There may still be a few months to benefit from slightly lower fixed rates if the BoC delivers another expected rate cut in March 2025. However, beyond that, the risk of rising rates increases significantly.
If you currently have a fixed-rate mortgage, exploring a refinancing option before the end of your term to avoid renewing between late 2026 and late 2028 could be worth considering. Paying a small penalty and taking a minor loss—or even saving money if your fixed rate is above 5%—might also be a sound strategic decision.
That said, every situation is unique. Before making a decision, it’s advisable to assess your risk tolerance, get precise calculations, and discuss your options with us.