Are 5-Year Fixed Rate Mortgages Going to Get Cheaper?

Some forecasts suggest that even though interest rates may drop further in the coming months, five-year fixed rate mortgages may have ‘bottomed out’

Earlier in October, the Bank of Canada (BoC) slashed its overnight lending rate by 0.5% marking the largest cut to interest rates since the decreases began in June. Economic trends indicate that cuts are likely to continue into 2025.

The mortgage rates banks and other lenders are able to offer are, of course, closely linked to the BoC rate — the lower it goes the more affordable mortgages become. However, while further decreases will pull variable rate mortgages down further, fixed rate mortgages, may not follow suit, according to recent forecasts from Desjardins.

Because fixed rates, don’t change over the course of the term, banks and other lenders must account for factors like bond yields in order to maintain profitability. Bond yields — the payout on investments that function as loans to the Canadian government — is a key indicator for assessing interest rate trends.

Desjardins’ forecast suggests that though interest rates will likely continue to come down, lenders have already priced those changes into their fixed five-year rates.

What does that mean for you as a potential homebuyer?

If Desjardins is right, it means that five-year fixed rates are as cheap as they are going to get in the next six months. Lower interest rates will also heat up the market, leading to more competition, and potentially higher prices. So, even if rates do come down further, buying a house may not necessarily become more affordable.

It is worth noting, however, that not all experts agree. Some have suggested that fixed-rate mortgages won’t bottom out until sometime next year, where mortgage specialist Ron Butler suggests we may see fixed rates dip below 4%.

Note that these forecasts are subject to significant change based on wider economic factors that are notoriously difficult to predict. “Nobody knows what happens in one or two years,” Butler says, adding that his forecasts only extend about six to eight months. “Two years from now we could see lower rates but (there’s) an equal chance of higher rates than today.”

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