Variable mortgage borrowers enjoy the sharpest rate declines since the Bank of Canada (BoC) started cutting in mid‑2024. But that window now looks set to narrow, with Desjardins warning that “the recent enthusiasm for variable rate mortgages may wane in 2026, especially if borrowers start anticipating new rate increases.”
In an economic viewpoint, Hendrix Vachon, principal economist at Desjardins, noted that the BoC had cut by 175 basis points in 2024 and a further 100 basis points in 2025, bringing the policy rate to 2.25%.
“While there is still a great deal of economic uncertainty, it’s not enough to justify further monetary easing, and the BoC still considers inflation risks to be overly high,” he said.
Variable mortgage pricing has moved quickly. “Variable rates on new insured loans were around 7.00% in June 2024 and are now slightly below 4.00%,” Vachon said.
Those reductions outpaced fixed terms because discounts to prime widened, with the spread between prime and the effective variable rate exceeding 50 basis points for new insured loans.
Fixed mortgage rates, by contrast, remain tethered to bond markets. The 5‑year Government of Canada yield “fell about 100 basis points lower in 2025, but had climbed back to around 3.00% in December,” Vachon said.
Desjardins estimated that 5‑year mortgage yields typically sat “about 20 points higher than Canadian government bond yields,” with securitization via Canada Mortgage Bonds helping insured borrowers access lower rates.
Vachon cautioned that “for 2026, the outlook is currently less favourable for variable rates.”
With the BoC on pause, “variable interest rates will remain stable in the quarters ahead. They could even rise in the coming years if the BoC announces a policy rate hike.”
Desjardins’ baseline assumed the long‑term neutral rate near 2.75%, implying “variable interest rates could go up around 50 basis points from their current level,” and projected two 25‑basis‑point hikes in 2027.
Borrower behaviour has already shifted. Before the pandemic, around 30% of new financing was in 5‑year‑plus fixed terms.
From 2022 to 2025 that share hovered nearer 15%, even though “rates for 5‑year fixed rate mortgages were on average 40 basis points lower than rates for mortgages with shorter terms” in 2023.
Instead, fixed terms between three and five years climbed from less than 20% of originations pre‑COVID to above 50% in 2024, remaining near 40% in 2025 as borrowers bet on lower renewal rates ahead.
Vachon earlier warned that “rapidly rising interest rates could seriously hurt the housing sector and drag other sectors of activity with it,” underscoring the risks on the other side of today’s low‑rate cycle.
With policy easing largely behind the market and modest hikes on the horizon, the relative advantage of variables over shorter‑term fixed products looks slimmer. Experienced brokers and lenders would need to stress‑test clients not just for today’s discounts, but for a rate path that could edge higher just as renewals start to roll in.
CMP
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