What a Bank of Canada Rate Drop Really Means for Your Mortgage and the Market

A question I get a million times after a Bank of Canada rate cut: “Does this change my mortgage rate?” Or even more commonly: “Since my mortgage is already approved, does that mean my rate will drop?” Buckle up, folks — today we’re diving into everyone’s favorite topic: interest rates and bond yields. Grab your coffee; you might need it, because there’s a lot to follow in the world of mortgages and rates! So, how would I answer those questions? The short answer: it depends on whether you have a variable rate or a fixed rate. Let’s break it down.

Variable Rates: The Direct Connection

If you’re in a variable-rate mortgage or using a line of credit, the Bank of Canada’s decision affects you immediately.

Here’s why:

• The Bank of Canada sets the overnight lending rate, the rate at which major financial institutions lend money to each other for very short periods.
• Lenders use this rate to set their prime rate. The prime rate is what lenders use to price products like variable-rate mortgages, HELOCs, and personal loans. Variable rate mortgages or HELOCs are tied directly to that prime rate.

So, since the Bank of Canada lowered its rate this month, your payment likely went down. Or, depending on your mortgage structure, more of your payment may now go toward principal rather than interest. If the Bank raised rates, the opposite is true: your borrowing costs increased right away.

Fixed Rates: Why They Don’t Move Instantly

Fixed mortgage rates don’t respond directly to the Bank of Canada’s moves. Instead, they follow the Government of Canada bond market, especially the 5-year bond yield for 5-year mortgages (A bond yield is the return an investor earns by holding a bond).

Here’s the connection:

• When you take a fixed-rate mortgage, your lender is essentially “locking in” your borrowing cost for a set period.
• To manage their risk, lenders look to the bond market, which is a reliable benchmark for the cost of borrowing money over different terms.
• The spread between the bond yield and the mortgage rate is how lenders cover costs and generate profit.

Why Bond Yields Matter

The bond market is forward-looking and often reacts to what it expects the Bank of Canada will do. Investors in government bonds are constantly trying to predict where the economy, and the Bank of Canada, are headed.

• If investors expect inflation to stay high, they demand higher yields on bonds. That drives bond yields up, and in turn, fixed mortgage rates go up.
• If investors believe inflation is cooling and the Bank will continue cutting rates, they’re more willing to accept lower returns on bonds. That pushes bond yields down, and fixed mortgage rates tend to follow.

This is why you sometimes see fixed mortgage rates move before an official Bank of Canada announcement. By the time the Bank confirms its decision, the bond market may have already “priced in” the expectation.

And this is also why you don’t usually see an instant drop in fixed rates after a Bank of Canada cut. Lenders adjust fixed rates based on bond yields and their own funding costs, not the overnight rate itself, so the impact often comes later, and only if bond yields continue to trend lower. 

Timing and Lender Decisions

Even when bond yields shift, lenders don’t always adjust their posted mortgage rates right away. They tend to watch the trend for a bit, weigh their own funding costs, and keep an eye on competitor pricing.

It’s also worth noting that banks are usually quicker to raise fixed rates when bond yields climb and slower to lower them when bond yields fall. This cautious approach helps protect them from sudden market swings and ensures their costs are covered.

So, if you didn’t see fixed rates drop the morning after last week’s Bank of Canada announcement, it doesn’t mean nothing is happening. The adjustment is often happening in the background, and it can take days—or even weeks—before it shows up in posted mortgage rates.

What This Means Going Forward

The key takeaway:

• Variable rates respond immediately to Bank of Canada changes.
• Fixed rates follow bond yields, which move on expectations of what’s coming, not just the news of the day.

The encouraging part is that rate cuts often signal an environment where borrowing costs are trending downward. While it’s not instant, this usually sets the stage for lower fixed rates in the months ahead.

Bringing It Back to You

This month’s Bank of Canada announcement might not have changed your rate today, but it’s shaping the direction of rates tomorrow.

If you’re:

• Considering buying soon
• Debating between fixed and variable
• Coming up to renewal
• Wondering if a refinance makes sense

…it’s worth having a conversation (Hi! I’m here to help!) about how the current bond market and Bank of Canada decisions could impact your personal situation. 

The final question I hear all the time is: “Which is better — fixed or variable?” I’ll leave you with this: there’s no one-size-fits-all answer. Mortgage rates move for a lot of reasons — some obvious, some behind the scenes. The best approach? Stay informed, ask questions, and trust your gut. Make the choice that feels right for your situation.