After a 27-month anxiety marathon that saw 475 basis points of rate hikes, Bank of Canada governor Tiff Macklem turned into a summer Santa on Wednesday, trimming Canada’s key lending rate by 25 basis points.

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The move gives mortgagors hope that there’s a lot more where that came from. And if history is a guide, they’ll get their wish.
Markets are now fully pricing in rate cuts in September and December. But if inflation behaves and we don’t get blowout jobs data in the interim, the next cut could be pulled forward to July. 

Overall, markets expect more than 200 bps of rate cuts in this cycle, which could last through much of next year. That would be right on time for the bulk of those facing mortgage renewals — most of which are due in 2025 and 2026.

It’s also enough to make variable rates the odds-on favourite to save people the most money in the next five years, at least on paper.

That said, it’s paramount that folks comparison shop extensively, as the sea of advertised rates is littered with junk. In fact, the average advertised uninsured variable rate, for example, is a staggering 63 bps above the lowest advertised rate.

In any event, with the prime rate dipping only 25 bps to 6.95 per cent, it’s no time to throw a financial freedom party just yet. Barring an economic crisis, rate cuts could be a long, drawn-out process that lasts through much of next year — assuming market forecasts are on point.

And that lines up with history, which suggests typical cutting cycles take more than a year to play out.

According to most sober forecasts, the economy is about to hit a rough patch, with rising unemployment, sluggish GDP growth, continued painful mortgage renewals and surging defaults (although not the catastrophic Global Financial Crisis-style defaults). All this should be enough to accelerate the downward momentum in rates.

Yet, those wary of payment risk won’t be swayed. Many will cling to the words uttered by the Bank of Canada governor on Wednesday: “A number of the forces that resulted in … very low interest rates look to be unwinding.” That could be enough to leave nagging doubt in the minds of borrowers who just saw rates go to the moon.

And there’s merit in Macklem’s warning. Despite the disinflationary effects of higher rates, and advances in supply chains and AI, the ghost of inflation risk lingers.

The key is not to let fear drive your decisions. Conservative borrowers should still play the odds. Yes, five-year fixed rates provide robust payment protection at a fair cost. However, many five-year mortgages are about as flexible as a frozen turkey (think steep prepayment penalties) and tend to underperform when rates soar above their 10-year average.

That’s why, even for cautious borrowers, they might still want to consider a medium-term fixed rate or a hybrid (part fixed / part variable). These terms at least provide some exposure to the likelihood of lower rates in the future.

Of course, while it hasn’t happened often, rates can reverse higher after a few cuts. That can occur if inflation reinflates. Although the preponderance of indicators suggests that’s a low probability this time around, in such cases in the past, rates have rebounded strongly in less than six months

For most of those in the mortgage market, variable rates provide more than enough upside payment protection, given the payments are fixed — unless rates absolutely skyrocket.

And even then, there are some lenders (e.g., BMO and CIBC) that generally keep your payments locked in despite big jumps in their prime rates.

In other words, variable rates are worth betting on here for financially secure, well-qualified borrowers, especially near the top of a rate cycle where cutting has just begun.

And if you’re out there home shopping and want to float your mortgage, you’ll be happy to know that payments will dip starting tomorrow. The Bank of Canada’s 25 bps gift knocks the starting payment down $63 a month on a $400,000 mortgage — assuming there are any homes left in Canada to buy with that small a loan.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

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