Should You Lock In a Fixed Mortgage Rate Now?

The Bank of Canada's overnight rate has been sitting in the mid-single digits for most of the past two years, and the spread between five-year fixed mortgage rates and the Government of Canada five-year benchmark bond is wider than it was through the easy-money decade after 2010. Posted five-year fixed rates at the Big Six banks are clustered roughly in the high-4% to low-5% range for insured purchases, while discretionary discounts have narrowed since 2023. Variable products tied to prime are pricing in the low-to-mid-5% range for strong applicants.

Against that backdrop, the question that comes up at almost every renewal meeting is whether to lock in a fixed rate now or ride a variable a little longer in the hope that the Bank of Canada moves further. There is no single right answer. The honest framing is that the choice depends on the size of the mortgage relative to household income, the renewal date, and how much month-to-month payment volatility a borrower can absorb without changing behaviour.

What the rate spread is telling you

When markets price an easing cycle, the bond curve typically slopes downward at the front end, which feeds through to fixed-rate offers. Bank of Canada commentary in its most recent monetary policy reports has emphasised that the path back to its 2% inflation target is not linear, and that services inflation and shelter components have been slower to cool than goods. That language matters. It is the reason posted fixed offers have not fallen as fast as some borrowers expected during the easing phase.

Royal LePage and RBC Economics both publish recurring affordability and rate outlook notes that track how shifts in the five-year Government of Canada yield translate into mortgage pricing with a lag of roughly two to six weeks. Watching that spread is more useful than guessing the Bank of Canada's next move. If the five-year GoC yield drops a half point and fixed offers do not follow within a month, lenders are widening margins and the next move on posted rates is probably down.

“The five-year fixed remains the default for most Canadian households because the certainty premium is small relative to the payment risk on a large mortgage.”

Where the stress test still bites

Federally regulated lenders continue to qualify uninsured mortgages under the OSFI B-20 minimum qualifying rate, which is the higher of the contract rate plus 2% or 5.25%. With contract rates in the high 4s, the qualifying rate is effectively the contract plus 2% for most applicants. That has tightened the maximum loan size meaningfully for borrowers at the edge of affordability, especially in Toronto and Vancouver where price-to-income ratios remain among the highest in the developed world.

CMHC's Residential Mortgage Industry Report has flagged that renewal cohorts originating in 2020 and 2021, when five-year fixed rates were below 2%, are now resetting hundreds of basis points higher. For a household that took out a $500,000 mortgage at 1.85% in early 2021, a renewal at 4.79% increases the monthly payment from roughly $2,080 to about $2,820 on a 25-year amortization. That payment shock is the real argument for picking a term that gets the household comfortably past its next employment or family transition, rather than chasing the lowest headline rate.

How most borrowers should think about it

For households with limited cash reserves, a five-year fixed at current rates is the conservative choice. It removes the renewal-timing question for the bulk of the mortgage and converts a financial decision into a budgeting one. For borrowers with stable, higher incomes and a meaningful cash buffer, a shorter fixed term of two or three years can preserve optionality if the easing cycle resumes. Variable rates make sense mainly for those who can absorb a further upward surprise without changing behaviour, and who are likely to pay the mortgage down faster than scheduled.

Mortgage products, qualifying rules and discount practices vary across federally regulated banks, credit unions and provincial lenders, and the rules around stress tests have been revised more than once since 2018. Confirm current contract terms, prepayment privileges and qualifying rates with a licensed mortgage professional. This is general reporting, not personal financial advice.