The Bank of Canada just cut its overnight rate to 2.25%, and Governor Tiff Macklem made something clear: this is probably where rates stay for a while. "The current policy rate is about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment," the Bank stated.
That changes the fixed versus variable calculation completely. For months, the question was how much lower rates would go. Now the question is whether they're done going down at all.
And according to some forecasts, rates might actually start climbing again in 2026.
Where Rates Actually Stand Right Now
As of October 30, 2025, the best five-year variable rate sits around 3.45%, while the best five-year fixed insured rate is closer to 3.69%. Variable rates are now priced below fixed for the first time in years, but the spread is narrow. Just 24 basis points.
That's not much breathing room. And it raises a critical question: if the Bank of Canada is signaling 2.25% is "about right," how much lower can variable rates actually go?
The Case for Variable Rates
Variable rates have been trending lower since June 2024, when the Bank of Canada started its rate-cutting cycle. The prime rate has dropped from 7.2% in June 2024 to 4.45% today. That's a massive decline in less than 18 months.
If you're on a variable rate mortgage with adjusting payments, you've already seen real savings. Someone with an average-priced home could see $84 per month in savings if their variable rate drops from 3.95% to 3.70% after the latest cut. That's $1,008 per year.
And there's potential for more savings. Some forecasts suggest the Bank could cut rates one more time, potentially bringing the policy rate down to 2.00% by early 2026. True North Mortgage CEO Dan Eisner predicts that another cut could bring most bank prime rates down to 4.20%, assuming the current spread with the Bank of Canada policy rate remains at plus 2.20%.
If you lock into a fixed rate today at around 3.94% for five years, your average mortgage interest costs will probably be higher than those of a variable-rate mortgage, assuming rates continue their modest decline through 2025.
Variable rates also come with a practical advantage: less costly penalties if you need to break your mortgage early. Your penalty is typically three months' interest, versus the Interest Rate Differential calculation that fixed-rate mortgages use, which can be substantially higher.
The Case Against Variable Rates
But here's where it gets complicated. National Bank of Canada predicts the Bank will cut its policy rate to 2.25% this year, then hike rates by 50 basis points in 2026. That would bring the policy rate to 2.75% by the end of 2026.
Scotiabank goes further, forecasting a rise to 2.75% by the end of 2026 as inflation pressures persist. And while RBC, TD, and CIBC expect the rate to hold steady at 2.25% through next year, none of them are projecting significant additional cuts either.
The trade war with the United States complicates everything. Tariffs create inflation, which limits the Bank of Canada's ability to keep cutting rates. At the same time, trade uncertainty damages the economy, which would normally call for lower rates. The Bank is stuck managing both pressures simultaneously.
David Larock of Integrated Mortgage Planners cautions that "five years is long enough for the next rate cycle to begin, and for variable rates to rise from wherever they bottom out over the near term." If you choose a five-year variable rate today, you need to be prepared for rates to rise at some point during your term.
Ron Butler, a mortgage broker with decades of experience, told Canadian Mortgage Trends this is "the most volatile time he's seen in the bond market in forever. It's literally like 2008, during the Global Financial Crisis, it's so wild."
The Mortgage Renewal Wave Changes Everything
About 60% of all outstanding mortgages in Canada are expected to renew in 2025 or 2026. Most of these are five-year fixed-rate mortgages that were signed in 2020 and 2021 when rates were at historic lows, around 2% or less.
According to Bank of Canada research, mortgage holders with a five-year fixed rate contract renewing in 2025 or 2026 could face an average payment increase of around 15% to 20% compared with their payment in December 2024.
Those with variable rates and variable payments, on the other hand, could see an average payment decline of around 5% to 7%.
National Bank economist Tyler Schleich explained that the anticipated rate hikes in 2026 would only come after the bulk of these renewals pass. "It's also not coincidental that rate hikes would begin after the big mortgage refinancing window passes," Schleich said.
In other words, the Bank of Canada might keep rates lower temporarily to help homeowners get through the renewal wave, then start hiking once that pressure eases.
What Fixed Rates Are Actually Doing
Fixed mortgage rates don't move with Bank of Canada changes like variable rates do. They're priced along with Government of Canada bond yields and adjust daily based on bond market trends.
As of October 30, 2025, the best five-year fixed insured rate is 3.69%, which is significantly lower than the peaks of 2023 when fixed rates were above 6%. But they're not expected to drop much further.
National Bank projects the Government of Canada five-year bond yield, an important benchmark for fixed mortgage rates, to hold near 2.65% by year-end, before gradually rising to about 3.0% by the third quarter of 2027.
Bond markets often move ahead of central banks. Several analysts say bond yields may now be signaling a floor. That means fixed rates have likely bottomed out and could start edging higher even before the Bank of Canada raises its policy rate.
If you're eyeing a fixed rate, the window to lock in at current levels might be closing.
The Three-Year Fixed Strategy
September 2025 data from True North Mortgage shows the three-year fixed rate choice outdrew the others as the favorite rate and term. As bond yields declined, the three-year rate offered a combination of savings and security, with a faster renewal time than both the five-year fixed and variable rates.
A three-year fixed term is a smart strategy to bridge today's uncertainty with 2026's projected rate environment. The three-year fixed rate is roughly 0.25% lower than a variable rate right now and slightly lower than the five-year fixed. When it comes time to renew in three years, you'll have more clarity on where rates are actually headed.
If variable rates drop further in 2025 and early 2026 as some forecasts suggest, you can switch to variable at renewal. If rates start climbing as National Bank and Scotiabank predict, you've locked in protection for three years at a good rate.
Who Should Choose Variable?
Variable rates make sense if you meet these criteria:
You have a high risk tolerance. You're comfortable with the idea that your rate could go up during your term, potentially significantly if inflation pressures re-emerge.
You believe the Bank of Canada will cut rates at least one more time. If you think rates are going to 2.00% or even 1.75%, variable rates will outperform fixed over the next year or two.
You plan to pay down your mortgage aggressively. Variable rate penalties are lower, so if you're planning to make lump sum payments or pay off your mortgage early, variable gives you more flexibility.
You're willing to monitor economic conditions. Variable rate holders need to stay informed about Bank of Canada decisions, inflation trends, and economic indicators. If conditions shift and rate hikes look likely, you need to be prepared to lock into a fixed rate before that happens.
Who Should Choose Fixed?
Fixed rates make sense if you meet these criteria:
You value stability and predictable payments. If knowing exactly what your mortgage payment will be for the next three to five years helps you sleep at night, that's worth something.
You believe the Bank of Canada is done cutting rates. If you think 2.25% is the floor and rates could start climbing in 2026 as some forecasts suggest, locking in now protects you from future increases.
You're renewing from a low rate. If you locked in at 2% or less in 2020 or 2021 and you're facing a significant payment increase at renewal, locking into a fixed rate around 3.69% to 3.94% caps your exposure. You know what your payment will be, and you can budget accordingly.
You don't want to think about your mortgage. Fixed rates are set-it-and-forget-it. You're not monitoring Bank of Canada announcements or worrying about whether rates are going up or down. You've locked in, and you're done.
The FOMO vs. JOMO Decision
True North Mortgage frames the decision in terms of FOMO versus JOMO:
FOMO, fear of missing out on budget savings from a variable rate that is lower and might trend even lower than a fixed-rate lock now.
JOMO, joy of missing out on the risk that a variable rate poses while you happily lock into a great fixed rate and sleep soundly until your renewal.
That's the real question. Are you more afraid of missing out on potential savings if rates keep dropping, or more afraid of being caught with a rising variable rate if the Bank starts hiking in 2026?
What the Data Says About Historical Performance
Variable rates have historically outperformed fixed rates over time. That's well documented. But the key word is "historically." The next five years might not look like the last 30.
We're in a period of unprecedented economic uncertainty. Trade wars, sticky inflation, structural economic damage from tariffs, these aren't normal conditions. The Bank of Canada itself acknowledged that monetary policy has limitations in this environment.
Past performance doesn't guarantee future results. And right now, the gap between variable and fixed rates is so narrow that the margin for error is small.
How Coldwell Banker Horizon Realty Can Help
At Coldwell Banker Horizon Realty, we understand that choosing between fixed and variable rates isn't just about numbers. It's about your financial situation, your risk tolerance, your life plans, and your peace of mind.
Whether you're a first-time buyer trying to figure out which mortgage type makes sense, a homeowner facing renewal and weighing your options, or someone looking to refinance to take advantage of current rates, we provide the expertise and guidance you need to make an informed decision.
The fixed versus variable decision is more complex right now than it's been in years. The spread is narrow, the economic outlook is uncertain, and forecasts are all over the map. You need someone who can walk you through the pros and cons based on your specific situation.
Contact Coldwell Banker Horizon Realty today to discuss your mortgage options and get personalized advice on whether fixed or variable makes sense for you in this unique rate environment.
The Bottom Line
Variable rates are lower than fixed rates right now, but not by much. The Bank of Canada has signaled that 2.25% is "about the right level," which suggests the cutting cycle is over or nearly over.
Some forecasts predict one more cut to 2.00% by early 2026. Others predict rate hikes starting in the second half of 2026. Nobody knows for sure, and that uncertainty is the problem.
If you're highly risk-averse, locking into a fixed rate around 3.69% to 3.94% for five years gives you certainty and protection against future hikes. If you're comfortable with some risk and believe rates will stay low or drop further, variable rates around 3.45% to 3.70% offer potential savings.
The three-year fixed option splits the difference, giving you a lower rate than five-year fixed while reducing your exposure to long-term rate volatility.
There's no universally right answer. It depends on your situation, your risk tolerance, and your view of where the economy is headed. But one thing is clear: the days of ultra-low rates are gone. The new normal for Canadian mortgages is here, and it's sitting somewhere in the mid-to-high 3% range.
Make your decision based on where rates actually are today, not where you hope they'll go tomorrow. Because 2.25% might be as good as it gets for a while.
The content of this article is for informational purposes only and should not be considered as financial, legal, or professional advice. Coldwell Banker Horizon Realty makes no representations as to the accuracy, completeness, or suitability of the information provided. Readers are encouraged to consult with qualified professionals regarding their specific real estate, financial, and legal circumstances. The views expressed in this article may not necessarily reflect the views of Coldwell Banker Horizon Realty or its agents. Real estate market conditions and government policies may change, and readers should verify the latest updates with appropriate professionals.
