Fixed mortgage rates continue to climb as borrowers weigh the variable discount

  10/1/2026 |   SHARE
Posted in Canadian Economy and Interest Rates by Vanguard Realty | Back to Main Blog Page

Fixed mortgage rates are climbing again after another jump in Canada’s 5-year government bond yield, extending an upward trend that began around the outbreak of the war in Iran in late February.

The yield has risen from roughly 2.6% before the war to above 3.6%, topping 3.7% on Monday. CIBC and TD raised select 3- and 5-year fixed mortgage rates on Tuesday, joining other major banks and lenders that have increased rates in recent weeks.

Why bond yields are rising

Seven months into the war, elevated oil and commodity prices are fuelling inflation concerns, while several major central banks have raised interest rates.

While the Bank of Canada has held its policy rate steady, rising global bond yields, particularly in the United States, are putting upward pressure on Canadian yields.

“Australia increased, Europe’s increased twice, Japan has increased, the United States we saw has increased,” says Bruno Valko, vice-president of national sales at RMG Mortgages. “Canada is the outlier here so far, and with all these other countries increasing, there’s definitely potential upward pressure.”

OIS markets appear to agree and are now pricing in a total of 100 basis points in Bank of Canada rate hikes over the next 12 months.

Valko also points to high government debt levels and borrowing by AI companies to fund data centres as factors putting upward pressure on yields. “It’s almost like a perfect storm in the sense that it’s not just one thing,” he says.

Will the Bank of Canada raise interest rates this year?

While Valko says the pressure on the Bank of Canada to increase rates is growing, the decision will likely come down to the consumer price index report due October 19.

He says stable core inflation could give the Bank room to hold, while signs of broader inflation pressure could strengthen the case for a hike.

“I think the chance of a Bank of Canada increase on either October 28 or December 9 is almost 100%,” says Ron Butler of Butler Mortgage. He suggests that upward price pressure on global commodities, primarily driven by conflicts in Ukraine and Iran, will inevitably impact Canadian consumers, and force the Bank of Canada’s hand.

Butler points to rising wheat, corn and soybean prices as pressures that could continue feeding through to food costs. “The damage is already done,” he says.

He also points to the weakening Canadian dollar, which has made imports more costly, adding to the pressure from Canadian tariffs on U.S. goods.

“My guess is that we will see a [5-year fixed mortgage] rate from a bank starting with five in the next six to eight weeks,” he says.

On the outlook for the Bank of Canada’s policy rate, however, views are more divided. At an industry event last week, TD deputy chief economist Derek Burleton said “the case for hiking is not that compelling” and that “the Bank of Canada will sit on its hands.”

He argued that core inflation has remained relatively stable in Canada compared with its G7 and G20 peers.

“Right now, bond market investors are pricing in five quarter-point hikes by the Bank of Canada over the next year, and I’m going to be blunt: I think that’s crazy. I just I don’t see it,” says Dave Larock of Integrated Mortgage Planners.

Larock suggests that recency bias has many comparing today’s economy with the post-COVID era of supply-chain challenges, stimulus payments and pent-up demand.

“We’re in a very different situation now because the reason why energy prices are too high is because we have a supply shock,” he says. “Rate hikes won’t reopen the Strait of Hormuz.”

Larock adds that higher energy prices are already squeezing discretionary spending, as Canadians put more of their household budgets towards necessities like food, shelter and energy. “That is having a disinflationary impact,” he argues.

Larock believes the Bank of Canada is more focused on the ongoing trade war with the United States, an economic shock he expects to outlast elevated energy prices and strengthen the case for lower interest rates. At the same time, he cautions that forecasts require a degree of humility given the potential for further unexpected economic shocks.

How borrowers are reacting

As fixed rates continue to climb, Clinton Wilkins of the Clinton Wilkins Mortgage Team says borrowers are moving towards variable-rate products, with some offers more than a full percentage point below comparable fixed rates.

“Historically, about 60% of borrowers take a five-year fixed, and now I would say more than 60% of borrowers are taking variable,” Wilkins says. “In some markets and with some brokers, close to 90% of borrowers are taking a variable.”

With such a significant discount, some borrowers are betting that variable products will cost less over their terms, even if rates rise. Others don’t have the luxury of choice.

“It may be months or even years for it to be in a break-even position, and historically borrowers do best in a variable-rate mortgage product,” he says. “Even from a qualification standpoint, some borrowers will take a variable just because it will be easier to qualify than it would be to qualify for a fixed, as crazy as that might sound.”

Larock is even more blunt, saying the widening gap between fixed and variable rates can leave some Canadians able to qualify for a variable mortgage but unable to qualify for a fixed mortgage on the same loan amount.

“It just doesn’t make sense that in uncertain times, the most marginalized borrowers who can barely qualify should have to take variable rate mortgages because that’s the only mortgage they can qualify for,” he says. “That is an obvious, glaring problem in [OSFI’s] qualification rules that they have been aware of for quite some time and have not fixed.”

Source: Canadian Mortgage Trends

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