Bank of Canada Rate Changes: Why Variable Mortgages Shift but Fixed Rates Don’t

Understanding how mortgage rates move can feel confusing especially when the Bank of Canada announces a change and only certain types of mortgages respond. If you’ve ever wondered why your variable mortgage rate changes instantly after an interest rate announcement, while fixed rates often stay exactly the same.

This guide breaks down how each type of mortgage reacts to market forces, why the Bank of Canada influences them differently, and what this means for your next mortgage decision. Whether you're a first-time homebuyer or planning to refinance, understanding the mechanics behind rate movements can help you make confident financial choices.

At GNE Mortgages, our experienced mortgage brokers in Mississauga help people navigate these decisions every day. Let’s dive in.

What Happens When the Bank of Canada Changes Its Rate?

When the Bank of Canada cuts rates or increases them, the immediate impact is on variable-rate mortgages. That’s because variable mortgages are tied directly to each lender’s prime rate, which closely follows the Bank of Canada’s policy interest rate.

So when the central bank makes a move—either a decrease or an increase—lenders usually adjust their prime rate within hours.

This affects:

• Variable-rate mortgage interest costs

• Lines of credit

• HELOCs (Home Equity Lines of Credit)

For homeowners with a variable-rate mortgage, rate cuts mean lower interest charges and potentially lower payments (depending on the type of variable mortgage). Rate hikes, on the other hand, push payments up or increase the share of your payment going toward interest.

Why Do Variable Mortgage Rates Move Immediately?

Variable mortgage rates are structured to track the lender’s prime rate. For example:

• If your lender’s prime rate is 6.70%,

• And your variable mortgage is Prime – 1%,

• Your rate becomes 5.70%.

When the Bank of Canada changes its rate:

• The prime rate goes up or down.

• Your mortgage rate follows directly.

This is why you feel the impact right away.

Variable rates change because lenders borrow money at rates influenced by the central bank. If it becomes cheaper for banks to borrow, they can pass the savings on to consumers. If borrowing becomes more expensive, they raise rates to manage risk.

This relationship is tight and direct, which is why variable rates shift in real time with every Canada interest rate announcement.

Also Read: Fixed vs. Adjustable-Rate Mortgage: What’s the Difference

Why Fixed Mortgage Rates Don’t React the Same Way?

Many people assume fixed mortgage rates should rise or fall every time the Bank of Canada makes a decision—but that’s not how fixed rates work.

Fixed Rates Are Driven by the Bond Market

Fixed mortgage rates in Canada are based primarily on the Government of Canada bond yields, especially the 5-year bond yield. These yields move according to:

• Inflation expectations

• Economic forecasts

• Market predictions about future Bank of Canada rate moves

• Global financial trends

• Investor confidence

When bond yields rise, fixed mortgage rates tend to rise. When bond yields fall, fixed rates usually decrease.

But here’s the key point:

Bond yields react to future expectations—not today’s announcement.

This means:

• If investors have already priced in future rate cuts or hikes, bond yields may barely move when the announcement actually happens.

• If the announcement matches expectations, fixed rates may not change.

• If the Bank of Canada surprises the market, then you may see fixed rates jump or fall quickly.

  
  

Why Fixed Rates Might Stay the Same After a Rate Cut?

Here’s a real-world example:

Say the Bank of Canada cuts rates by 0.25%. Canadians expect fixed rates to drop. But bond traders may have predicted that cut weeks earlier and already adjusted yields downward. So when the announcement comes:

• Bond yields don’t fall further

• Fixed mortgage rates don’t change

This often confuses consumers. But the truth is: fixed rates move on expectations, not reactions. Think of bond yields as a financial forecast. If the forecast already accounted for the change, nothing dramatic happens on announcement day.

Also Read: What Is a Reverse Mortgage and How Does It Work?

Bond Yields and Inflation: The Hidden Drivers of Fixed Rates

If you follow fixed mortgage rates closely, you’ll notice they fluctuate even when the Bank of Canada makes no announcement. This is because bond yields move constantly.

Bond yields rise when:

• Inflation is high

• Economic growth is strong

• Investors anticipate future rate hikes

Bond yields fall when:

• Inflation slows

• Economic conditions weaken

• Investors expect future rate cuts

This is why fixed rates:

• Can rise even when the Bank of Canada is cutting rates

• Can fall even when the Bank of Canada is holding rates

• Don’t react instantly to policy announcements

  
  

Variable vs. Fixed: Which One Responds Faster?

Here’s a simple breakdown:

Mortgage Type	Respond to the Bank of Canada?	Mechanism	Speed
Variable	Directly	Bank of Canada rate → Lender prime rate	Immediate
Fixed	Indirectly	Bond market expectations	Gradual or delayed

This is why fixed and variable rates can move in completely opposite directions. For example:

• The Bank of Canada cuts rates → variable rates drop

• But inflation data pushes bond yields higher → fixed rates rise

Many Canadians are surprised when this happens, but it's a normal outcome of how each mortgage type is priced.

Which Mortgage Is Better Right Now?

There’s no universal answer. It depends on your financial comfort level and how you feel about risk.

Choose a Fixed Mortgage If You Want:

• Stability

• Predictable payments

• Protection from future rate spikes

Fixed mortgages are popular during times of uncertainty or rising interest rates.

Choose a Variable Mortgage If You Want:

• Lower initial rates

• The ability to benefit when the Bank of Canada cuts rates

• Flexibility to convert to fixed later

Variable mortgages work well when:

• Rates are trending downward

• Inflation is cooling

• Economic conditions are softening

But they can be risky if rates rise unexpectedly.

How to Decide: Practical Tips for Canadians

Here are a few questions to guide your choice:

1. Can your budget handle payment increases? If not, fixed may be safer.

2. Are you planning to sell or refinance soon? Variables often have lower penalties.

3. Is inflation trending up or down? This affects both bond yields and variable rates.

4. Does the market expect future rate cuts? If yes, a variable mortgage could pay off.

If you’re unsure, speaking with a mortgage professional can help you understand what fits your long-term goals.

Also Read: First Mortgage Appointment?

How GNE Mortgages Can Help

At GNE Mortgages, our experienced mortgage brokers in Mississauga specialize in helping Canadians make informed mortgage decisions. Whether you're renewing, refinancing, or buying your first home, we analyze both bond market trends and Bank of Canada policies to guide you toward the best rate and mortgage product for your situation.

We help you:

• Compare fixed vs. variable options

• Understand rate trends

• Secure competitive mortgage rates

• Make smart decisions based on your budget and goals

  
  

Final Thoughts

While the Bank of Canada plays a major role in shaping interest rates, it doesn’t influence all mortgage types the same way. Variable mortgage rates react directly and immediately. Fixed mortgage rates, on the other hand, move according to the bond market—and those movements are shaped by expectations about the future, not just today’s news.

Understanding these differences can help you choose the right mortgage and avoid confusion when rates move in unexpected ways. And when you’re ready for expert guidance, we are here to help you navigate your options with confidence.