When shopping for a home in British Columbia, whether you’re looking at the skyline of Vancouver, the suburbs of Surrey, or the growing communities in Prince George—one of the most frequent questions borrowers ask is: how are fixed mortgage rates determined?
While variable rates often dominate the news cycle due to their direct link to the Bank of Canada’s overnight rate, fixed rates operate on a completely different set of mechanics. They are influenced by a sophisticated interplay of global bond markets, national economic indicators, and your unique financial profile. Understanding these factors is essential for any homeowner trying to time the market or choose the right mortgage product.
What is a Fixed Rate Mortgage?
A fixed-rate mortgage is a home loan where the interest rate stays the same for a specific term, usually 1 to 5 years. Because the rate is locked in, your monthly principal and interest payments do not change during that term, no matter what happens to interest rates in the market.
How Are Fixed Mortgage Rates Determined?
Contrary to popular belief, fixed rates do not move in lockstep with the Bank of Canada’s benchmark rate. Instead, they are primarily driven by three core pillars.
1. The Bond Market and AAA Ratings
The primary engine behind fixed mortgage rates is the Government of Canada 5-year bond yield. Lenders do not usually use their own cash to fund your mortgage; instead, they “borrow” money from the investment market by selling Mortgage-Backed Securities (MBS).
- AAA Credit Ratings: Most high-quality mortgages are bundled into securities that carry a AAA credit rating. This is the highest possible rating, signifying an incredibly low risk of default.
- Investor Demand: Risk-averse investors (like pension funds) buy these AAA-rated bonds because they want a guaranteed, safe return. When bond yields go up, the cost for the bank to “buy” the money for your mortgage goes up, and fixed rates rise accordingly. If you can secure a mortgage that fits the criteria for these AAA-rated securities, you often benefit from the most competitive rates available.
2. Macroeconomic Influences
Lenders look at the broader “health” of the country to set their baseline pricing. Key factors include:
- Inflation Rates: Inflation is the enemy of fixed rates. If inflation is high, lenders demand a higher interest rate to ensure the money they are paid back in five years still has significant purchasing power.
- Monetary Policy: While the Bank of Canada affects variable rates directly, its “outlook” affects fixed rates. If the Bank signals that the economy is overheating, bond investors get nervous and drive yields up, causing fixed rates to climb.
- Market Demand: In high-growth areas like Kelowna or Abbotsford, lender competition can sometimes lead to localized “specials,” but the broad market movement is always tied to national economic data.
3. Individual Risk Assessment
While the bond market sets the “wholesale” price, your personal financial health determines your “retail” price. Lenders evaluate:
- Credit Score: A higher credit score signals you are a low-risk borrower, allowing the lender to offer you a lower rate.
- Loan-to-Value (LTV) Ratio: If you have a larger down payment (lower LTV), the lender has more security, which often results in better pricing.
- Employment Type: Those who are self-employed or looking for commercial financing may see different rate structures based on the perceived risk of their income stream.
Will Fixed Mortgage Rates Drop?
The question on every Canadian’s mind is: are fixed mortgage rates going down in Canada?
Because fixed rates follow the bond market, they are “forward-looking.” They often move before the Bank of Canada makes an official move. If investors see signs of a recession or cooling inflation, bond yields will drop, and fixed rates will follow.
When will fixed mortgage rates drop?
As we look toward the remainder of 2025, the answer to will fixed mortgage rates go down depends on:
- The Consumer Price Index (CPI) consistently hitting the 2% target.
- A stabilization in global markets that allows bond yields to soften.
- The transition from a “restrictive” economic policy to a “neutral” one by the federal government.
While we have seen some relief in the bond market recently, it is vital to remember that rates are subject to change without notice based on daily market shifts.
Staying Protected in a Changing Market
Understanding how are fixed mortgage rates are determined allows you to navigate the market with confidence. While you cannot control global bond yields, you can control your credit score and your choice of mortgage professional.
If you are looking for stability, a fixed rate offers the “weatherproof” protection needed to ride out economic uncertainty. Are you ready to find the best rate for your situation? Use our mortgage calculator to estimate your payments, or contact Asim Ali today to lock in a rate before the next market shift.