As we prepare for the Bank of Canada to continue with their rate cuts, mortgage lenders have now started reducing their variable rate discounts off prime rate. In other words, mortgage lenders are becoming less aggressive with their variable rate offerings, meaning those currently shopping for a variable rate mortgage would now be offered higher effective rates. 

 

Why are Variable Rate Discounts Being Reduced? 

Whether we’re talking about fixed or variable rates, multiple factors influence a mortgage lender’s pricing strategy. Ultimately, it all comes down to the lender’s profit margin. When margins shrink, lenders need to make upward adjustments to their rates to remain profitable. With variable rate mortgages, this adjustment is made by reducing the discount off the prime rate.

Risk assessment is another crucial factor. Economic uncertainty can significantly influence a lender’s willingness to offer competitive rates. With global markets facing ongoing volatility and domestic economic concerns, lenders are taking a more cautious approach. The unpredictability of US President Donald Trump does not help the matter. If he were to implement his proposed tariffs, the Bank of Canada might be forced to implement deeper rate cuts than initially expected. This would lead to a lower prime rate, which could prompt lenders to manage their risk exposure by further reducing the discounts they offer on variable rate mortgages.

The next scheduled rate announcement from the Bank of Canada is set for January 29th, where an additional 0.25% rate cut is widely anticipated. While this will directly impact variable rate mortgages, it does not have an immediate or direct effect on fixed-rate mortgages.

 

Fixed Mortgage Rates Have Been Rising 

Despite the Bank of Canada cutting their rate by 1.00% in the final quarter of 2024, fixed mortgage rates have increased by roughly 0.30% over the same period. We’ve already seen a large spike in bond yields this month which has prompted some lenders to raise their fixed rates. Fortunately, the yields have since settled, but we would need to see them continue to fall before we see any meaningful reductions in fixed rates.

 

My Final Thoughts 

With more cuts expected from the Bank of Canada and with the looming threat of tariffs among us, it’s possible that we could see further reductions to variable rate discounts. If you have a mortgage renewal or purchase closing within the next 120 days, then the only way to protect yourself from this would be to get something locked in. 

The lowest variable rate mortgages currently range from prime -1.00% to prime -0.85% for majority of situations (currently 4.45% to 4.60%). 

The mortgage rate market is continually evolving. Forecasts change as new information becomes available. What’s expected with rates today may be different from what’s expected a month from now. This can make it more challenging when trying to choose the right mortgage for you. The talented team at PMT Mortgage is standing by to advise you on your options and to help you to make the best decision for your specific needs.  

As for what we can expect from mortgage rates in 2025? Time will tell and anything can happen.