If you carry a mortgage or have been trying to enter the housing market, you’ve likely seen interest rates climb sharply over the past two years. Both fixed and variable mortgage rates reached levels not seen in recent memory, prompting many buyers and existing mortgage holders to choose fixed terms to avoid further increases. At the same time, homeowners who locked into variable-rate mortgages before rates rose have experienced large jumps in monthly payments.
It’s been a difficult period for homeowners and first-time buyers. The Bank of Canada has paused rate hikes since July 2023, and recent economic data has experts suggesting that cuts could be coming. What should Canadians expect for interest rates in the months ahead, and how will those changes affect fixed and variable mortgage rates? We spoke with an economist and a mortgage broker to clarify the outlook and to help you decide which mortgage type might suit you in 2024.
Answer a few quick questions to get a personalized rate quote*
I’m renewing/refinancing
You will be leaving MoneySense. Just close the tab to return.
What drove the sharp rate increases in 2022–2023?
Interest rates rose dramatically as central banks reacted to post-pandemic inflation. Robert Hogue, assistant chief economist at RBC Economics, points out that central banks moved aggressively—raising rates by roughly 475 basis points since March 2022. That pace of tightening is the most aggressive seen in a generation.
Mortgage broker John-Andrew Newman of Oakville, Ont., explains that pandemic-era policies pushed rates to historic lows to cushion the economy during lockdowns. As the economy reopened, inflation accelerated and central banks reversed course, raising rates quickly to bring inflation under control. The result was a sharp swing—what Newman calls a “whiplash effect”—from extremely low rates to much higher borrowing costs.
Those shifts hit different mortgage holders in different ways. Many who secured fixed rates before the pandemic now face steep payment increases when their terms renew. Variable-rate borrowers experienced the impact depending on whether their mortgages have adjustable payments or fixed payments. Adjustable-payment variable mortgages rose in cost as the lender’s prime rate increased, while borrowers on variable mortgages with fixed monthly payments often saw the portion of each payment applied to interest increase and the principal portion decline. In some cases, amortization schedules have stretched so far that payments are close to interest-only, and a few borrowers reached their trigger rate—the point where monthly payments no longer cover interest.
Interest rate outlook for Canada in 2024
Most economists expect a gradual easing of interest rates beginning in 2024. Although the Bank of Canada’s policy rate doesn’t directly set mortgage rates, it influences variable rates immediately and affects fixed rates indirectly through bond markets and yields.
Hogue explains that as the Bank of Canada begins to lower its policy rate, bond yields are likely to move lower first, which typically drives fixed mortgage rates down before variable rates decline. In his view, bond yields could fall before the central bank starts cutting, possibly well before mid-2024.
Hogue predicts the Bank of Canada will begin cutting the benchmark rate in mid-2024 and proceed cautiously through the rest of the year. He expects roughly 100 basis points of cuts in the second half of 2024—bringing the policy rate closer to 4% by year-end—and suggests that rate reductions may continue into 2025. Even so, a 4% policy rate would remain relatively restrictive.
Inflation remains a key constraint. While policymakers have taken actions to steer inflation back toward target, inflation rates and economic lags mean the road to lower rates will be measured and dependent on incoming data.
Are variable rates becoming the better option again?
Variable-rate mortgages were popular when rates were at historic lows because they often carried lower rates than fixed terms. With the expectation of rate cuts, some homeowners are reconsidering variable-rate options to capture potential future savings. Whether a variable rate makes sense depends largely on your tolerance for risk and your financial situation.
Newman advises that choosing between fixed and variable hinges on two things: your view of where rates are heading, and your ability to absorb higher payments if rates move up. For borrowers comfortable with some risk—especially those who can handle temporary payment increases or plan short terms—a variable mortgage could offer savings if rates decline. For those who need payment certainty or have tight budgets, a fixed rate remains a prudent choice.
Should you choose fixed or variable in 2024?
The right choice is personal. If you can’t tolerate the possibility of a sudden payment spike, a fixed-rate mortgage is likely safer. Consider your broader financial plan, how long you expect to keep the home, and whether you might need to break the mortgage early—a costly prospect with many fixed terms. Newman recommends mapping out scenarios, including potential moves or job changes, before deciding on term length and mortgage type.
From a financial planning viewpoint, weigh immediate interest savings against interest-rate risk and contract length. A shorter term or a variable rate may suit those expecting significant changes, while a longer fixed term may protect those on tight or fixed incomes.
Variable rate vs. fixed rate — recommended profiles
Newman summarizes mortgage suggestions for common borrower profiles:
| Borrower profile | Recommendation |
|---|---|
| A young couple with a toddler and another child on the way | Fixed rate with extended amortization (for example, a 30-year schedule) to lower monthly payments now and catch up on principal later. |
| An older couple with low expenses, fixed income and healthy savings | Fixed rate if budget is tight; or variable with adjustable payments if cash flow allows and paying out the mortgage is an option. |
| Experienced property owner with strong net worth and high risk tolerance | Variable with adjustable payments to take advantage of potential rate drops. |
| Single person planning to sell soon and facing renewal | Convertible fixed-rate mortgage (convertible to an open mortgage after six months) to retain flexibility; variable rate is also an option. |
| Someone expecting a large lump sum (inheritance or asset sale) | Variable or open variable mortgage may work, since early repayment penalties are minimal or absent. |
| Couple planning divorce and imminent renewal | Variable or open products to avoid the large penalties tied to breaking fixed-rate contracts. |
| Very risk-tolerant borrower focused on paying down the mortgage quickly | Variable, especially with a fixed-payment variable option that increases principal payments if rates fall. |
Before you get a mortgage or renew in 2024
Getting a mortgage is a personal decision similar to setting up a budget, preparing legal wills, or building an estate plan. It helps to consult an expert—a mortgage broker or financial planner—who can explain the trade-offs and help you compare rates and term lengths. Finding the “right” mortgage isn’t only about the lowest rate; it’s about matching the mortgage to your timeline, goals and risk tolerance.
Outlook: rates expected to ease and hope for homeowners
After the pandemic-driven economic shock and a challenging period for mortgage holders, there are reasons to be cautiously optimistic. Rates are expected to trend lower, which should ease pressures on monthly budgets over time. It won’t be an instant fix, but a gradual decline in rates would make homeownership more affordable and give prospective buyers greater confidence.
Newman sums it up: “There is a more promising sense going forward.” For many homeowners and buyers, the next year could bring relief and more manageable costs.
Read more about mortgages:
- Renting vs. owning: Can you be financially secure without buying a home?
- Toronto housing bubble: Is it ready to pop?
- Tools to calculate your mortgage payments and costs in Canada
- What does the new Canadian Mortgage Charter mean for homeowners?