When it comes to mortgages, predictability is often a top priority for most borrowers. Many Canadian homebuyers want to know that their monthly payments will remain stable, regardless of what happens in the broader economy. A fixed-rate mortgage provides exactly that security. With fixed rates, the predictability makes budgeting easier and shields you from surprises if borrowing costs rise. 

This type of mortgage appeals to those who want peace of mind, especially during times when interest rates are fluctuating rapidly and unpredictably. At the same time, fixed mortgages can be less flexible and sometimes more expensive than variable mortgages. Understanding how fixed mortgages work and how they compare will help you determine whether locking in your rate is the right move, considering the market and your specific situation.

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Key Takeaways

• A fixed-rate mortgage keeps your interest rate and payments the same for your entire mortgage term.
• Fixed mortgages provide stability, making it easier to budget and plan for the long term.
• Borrowers may face significant penalties if they break a fixed mortgage before its maturity.

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What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a type of mortgage where the interest rate is set at the beginning of the term and remains unchanged throughout its entire term. Your mortgage payments remain consistent, regardless of any interest rate fluctuations that may occur during this time. 

How Do Fixed-Rate Mortgages Work?

When you choose a fixed-rate mortgage, you are locking in your interest rate for a chosen term. The mortgage term refers to the length of time your mortgage contract remains in effect. Depending on the lender, terms can range from as short as 6 months to as long as 10 years, although 3-year and 5-year fixed mortgages are usually the most popular choices among borrowers. 

How are Fixed Mortgage Rates Determined?

Mortgage lenders determine the interest rates on their fixed mortgages by considering several factors. These factors include their own funding costs, competitive pressures from other financial institutions, and broader market conditions. A key influence on all fixed mortgage rates is the bond market, specifically the yields of Government of Canada (GoC) bonds. 

Bond yields serve as benchmarks for fixed interest rates, and when they fluctuate, lenders typically adjust their fixed mortgage rates accordingly. This means that while your locked-in rate stays steady during your term, fixed rates offered to new borrowers can change in response to shifts in the bond market. 

Understanding How Bond Yields Impact Fixed-Rate Mortgages

Fixed mortgage rates in Canada are closely tied to movements in Government of Canada bond yields. Lenders use bond yields of the same duration as benchmarks when setting rates. For example, 3-year fixed mortgage rates are influenced by movements in 3-year Government of Canada bond yields, while movements in 5-year Government of Canada bond yields influence 5-year fixed mortgage rates. 

When bond yields rise, lenders typically increase their fixed mortgage rates to keep pace with the higher cost of borrowing money. When yields fall, lenders may lower their fixed rates, making borrowing more affordable for new borrowers. Tracking the movement of bond yields can give you an idea of where fixed mortgage rates may be heading. However, they cannot predict the exact timing or amount of change lenders will make to their mortgage rates. 

Lenders tend to move more quickly when raising fixed rates in response to rising bond yields, but are often slower to decrease rates when yields fall. This cautious approach ensures they can cover funding costs in periods of market volatility.

​​What Influences Bond Yields

Bond yields are influenced by and react based on a mix of economic signals and investor expectations. Inflation is one of the most significant drivers, as higher inflation erodes the future value of bond payments, prompting investors to demand higher yields as compensation. 

Global and domestic economic conditions also play a role, as strong growth or heightened uncertainty can shift demand for safe government bonds, causing yields to rise or fall. Signals from the Bank of Canada, such as changes to the policy rate or forward guidance on monetary policy, often influence investor behaviour and, in turn, bond yields. 

Why Fixed Mortgage Rates Are Higher Than Bond Yields

Lenders don’t set fixed mortgage rates to match Government of Canada bond yields. Instead, they add a spread on top of the yield to cover their funding costs, operating expenses, and profit margin. Typically, this spread falls within a range of 1% to 2% above the corresponding bond yield. 

For example, if the 5-year Government of Canada bond yield is currently 2.74% you can expect to see 5-year fixed mortgage rates ranging from 3.74% to 4.74% depending on the lender and other market conditions. This exact spread can widen when markets are volatile since lenders are more reluctant to lower rates if there is a chance bond yields could move higher in the coming days. 

Advantages of Fixed-Rate Mortgages

The main appeal of fixed-rate mortgages is their stability and predictability. Borrowers know exactly what their mortgage payment and interest rate will be throughout their entire term, which makes it easier to plan, budget, and reduce financial stress. This predictability can be especially valuable for first-time homebuyers or households with limited flexibility in their monthly cash flow. It allows them to focus on other financial priorities, such as ongoing expenses, saving for retirement, or building an emergency fund, without worrying about fluctuating monthly payments.

Fixed rates also act as a shield against rising borrowing costs. If market interest rates increase, borrowers with fixed mortgages are insulated from those hikes. There is no need to track interest rate announcements or bond yield movements during the mortgage term to guess and budget for how future payments might change. 

Disadvantages of Fixed-Rate Mortgages

Fixed-rate mortgages lock you into the same interest rate for the entire term, which is beneficial if rates rise but can work against you if rates fall. If rates fall, you could pay more than someone who chose a variable mortgage. Over a multi-year term, even slight differences in rates can add up to thousands of dollars in extra interest carrying costs.

Fixed mortgages can also limit opportunities to take advantage of falling rates. Since you’re locked in, you can’t easily switch to a lower-rate option without incurring prepayment penalties. This lack of adaptability can be restrictive, particularly for borrowers who anticipate needing to make changes to the mortgage before the end of their term.

Exceeding your annual prepayment limit or breaking your mortgage early can result in significant prepayment penalties. For example, breaking your mortgage in the middle of your term because you sell your home will likely result in a prepayment penalty using the interest rate differential (IRD). This penalty calculation is usually significantly higher than the 3 months of interest calculation used when breaking adjustable or variable mortgages. 

Fixed vs Variable Mortgages

Choosing between a fixed or variable mortgage is a decision that often comes down to your tolerance for risk, your financial situation, and your short-term and long-term plans for the property. For many borrowers, the decision also depends on timing. 

When rates are already high and expected to fall, a variable rate may be more attractive. When rates are low and expected to rise, fixed mortgages often prevail. In practice, some borrowers even combine both through a hybrid mortgage solution, splitting a portion between fixed and variable to balance security with the potential to realize savings.

Fixed

Fixed rates are particularly appealing to borrowers when interest rates are expected to rise, or when borrowers want predictability over flexibility. The trade-off is that fixed mortgages often miss out on rate savings if interest rates fall. You won’t benefit unless you refinance, which can trigger costly penalties that could outweigh any savings.

Variable

Variable rates are tied to a lender’s prime rate, which moves in response to the Bank of Canada’s overnight rate. This means that your mortgage payments (for an adjustable-rate mortgage) or the allocation between interest and principal (for a variable-rate mortgage) can change during your term. The primary advantage is cost savings, as borrowers with variable mortgages have historically paid less interest over time. However, variable rates introduce uncertainty; if rates rise, your payments could become less affordable, making it harder to budget.

Who Should Consider a Fixed-Rate Mortgage?

Fixed-rate mortgages aren’t the perfect fit for everyone, but they do serve certain types of borrowers particularly well. Fixed-rate mortgages are well-suited for borrowers who:

• Are buying their first home and could benefit from stability. First-time buyers often face steep learning curves when juggling higher housing expenses, including new costs such as property taxes and maintenance. A fixed-rate mortgage removes one source of uncertainty by ensuring that monthly payments remain the same, making it easier to settle into homeownership.
• Plan to stay in their home for many years. Borrowers who plan to remain in their home for the long term or at least for the duration of their mortgage term will avoid costly prepayment penalties. Additionally, having predictable and stable payments can make it easier to budget and save over time.  
• Are risk-averse and want to avoid surprises in their monthly payments. Some borrowers simply prefer peace of mind and would rather not worry about the potential that payments may fluctuate. Knowing exactly what portion of income goes towards mortgage expenses allows borrowers to plan for other financial priorities. 
• Expect interest rates to rise in the near future. When markets signal that borrowing costs are likely to increase, locking in can help borrowers save over the term. Even if fixed rates are initially higher than variable rates, they may still offer interest savings if interest rates are expected to rise. 

Frequently Asked Questions About Fixed-Rate Mortgages in Canada

Final Thoughts

Fixed-rate mortgages offer peace of mind through consistent payments, making them an attractive choice for many borrowers. In periods of economic uncertainty or when interest rates are expected to climb, the ability to lock in your rate can help protect your cash flow. This stability allows homeowners to plan for the future. However, fixed mortgages can be less flexible and more expensive over time if interest rates decrease while you are locked in. 

Whether you lean toward the stability of a fixed mortgage or the potential savings of a variable mortgage, getting the proper advice is key. A nesto mortgage expert can help you weigh your options, understand what may happen with future rates, and create a plan that aligns with your goals.

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Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned, salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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