Clients ask which is better, fixed or variable, expecting a simple answer. There is not one — the honest answer depends on what actually drives each rate, how comfortable the client is with payment uncertainty, and what the broker's own read of near-term conditions is worth (which, candidly, should be treated with humility; nobody reliably predicts rate movements). What a broker can teach with total confidence is the mechanism behind each rate, which is durable knowledge that outlasts any specific number quoted in this course. This course deliberately explains the mechanism rather than quoting a specific rate level as a fixed fact, precisely because rates move and a memorized number goes stale fast.
Fixed mortgage rates are priced primarily off Government of Canada bond yields of a matching or similar maturity — a 5-year fixed mortgage rate tracks the 5-year Government of Canada bond yield most closely, because that is roughly how long the lender itself is committing to lend the money at a fixed rate, and lenders fund that commitment largely by raising money in the bond markets over a similar horizon. When it costs a lender more to borrow over five years because bond yields have risen, that higher funding cost gets passed through to the fixed mortgage rate offered to the client, generally with a spread of roughly one to two percentage points added on top of the bond yield to cover the lender's costs, risk and margin.
Because bond yields are market-driven and respond to a wide range of factors — inflation expectations, economic growth data, global bond markets, expectations about future Bank of Canada policy — fixed mortgage rates can move even between Bank of Canada rate announcements, and can sometimes move in a different direction than the policy rate does, if bond markets are pricing in expectations the Bank has not yet acted on.
Variable mortgage rates are set as a spread relative to each lender's prime rate — commonly expressed as "prime minus" some percentage, though it can be "prime plus" depending on the specific product and the borrower's file. Prime rate itself moves in close step with the Bank of Canada's target for the overnight rate, which the Bank sets on eight scheduled announcement dates each year. When the Bank raises or lowers its policy rate, Canada's major lenders typically adjust their prime rates by a corresponding amount within days, and variable mortgage rates move automatically with that prime-rate change.
This is a fundamentally different mechanism from fixed-rate pricing: variable rates respond to a specific, scheduled policy decision by a single institution, while fixed rates respond continuously to bond market pricing. A client holding a variable-rate mortgage is, in effect, exposed to the Bank of Canada's policy path directly; a client holding a fixed-rate mortgage locked in whatever the bond market implied about that path (and the lender's own spread) at the moment they signed.
Because these two rates are driven by genuinely different mechanisms, they do not always move together, and the gap between them widens and narrows over time depending on what bond markets expect the Bank of Canada to do next. If bond markets expect future rate cuts, fixed rates can sit below current variable rates even while the policy rate itself has not moved yet — the fixed rate is pricing in an expectation, not a fact. The reverse can also happen. This is precisely why this module has avoided anchoring on a specific current rate level as a teaching point: the mechanism described here — bond yields for fixed, policy rate and prime for variable — remains true regardless of where either number happens to sit when a client is reading this, while a specific rate quoted today would be stale within weeks.
The practical skill for a broker is being able to explain, honestly and without false precision, why a client's fixed quote and variable quote look the way they do relative to each other right now, using this mechanism — rather than reciting a rule of thumb about which one is generally cheaper, which is not reliably true across time.
A client notices that 5-year fixed rates dropped noticeably last month even though the Bank of Canada has not held a rate announcement in that time. What is the most likely explanation?
Fixed mortgage rates are priced off bond yields, which trade continuously in financial markets and respond to inflation data, economic releases and shifting expectations well before — or even without — any actual Bank of Canada announcement. Variable rates are the ones tied directly to the Bank's scheduled policy decisions through prime rate; fixed rates are not on that same schedule at all, which is the exact distinction this module is built around. There is no error and no rule requiring fixed rates to wait for a Bank of Canada date.
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