Why U.S. Rate Cuts Don’t Always Lower Canadian Fixed Mortgage Rates

If you’re shopping for a mortgage or planning to renew soon, you might be wondering: "If interest rates drop in the U.S., does that mean fixed rates in Canada will drop too?"

It’s a great question - and the answer isn’t as straightforward as many people think. While Canada and the U.S. are economically connected, the way mortgage rates move in each country is very different. Let’s break it down in simple terms so you can feel more confident when making mortgage decisions.

 How Fixed Mortgage Rates Work in Canada

Fixed mortgage rates in Canada aren’t directly set by the Bank of Canada (BoC). Instead, they are mainly based on something called Government of Canada bond yields, especially the 5 year bond yield. When these bond yields go up or down, fixed mortgage rates usually follow.

Why? Because when lenders give you a mortgage at a fixed rate, they are essentially locking in that rate for a certain number of years. To protect themselves, they look to the bond market to see what kind of return they can get elsewhere. If bond yields are rising, lenders will charge more for fixed mortgage rates to make sure they still earn a profit.

So Where Do U.S. Rates Come In?

Even though we’re talking about Canada, U.S. financial markets have a big influence on our bond yields - and that’s where things get interesting.

The U.S. Federal Reserve (the Fed) sets the key interest rate in the U.S., and this affects their economy in major ways. But it also sends signals to investors around the world, including in Canada. So, when something big happens with U.S. rates - like a rate cut - people expect it to affect Canada too.

Here’s where the confusion often happens:

• Just because the Fed cuts its rate doesn’t mean Canadian fixed mortgage rates will fall.
• In fact, sometimes the opposite happens.

Why a U.S. Rate Cut Can Lead to Higher Canadian Fixed Rates

Let’s look at what’s happening right now.

Even though many investors think the Fed is going to cut its interest rate soon, bond yields in the U.S. are actually going up. That’s not what usually happens. Normally, when rate cuts are expected, bond yields go down. But investors are worried that inflation in the U.S. is not going away anytime soon.

So they want higher returns on long-term bonds to protect themselves from inflation. That’s pushing U.S. bond yields higher.

And since Canadian bond yields often follow U.S. bond yields (because our economies are so connected), this means Canadian fixed mortgage rates may also go up, even if both central banks are cutting rates. 

Quick Recap:

• Canadian fixed mortgage rates follow Canadian bond yields
• Canadian bond yields are influenced by U.S. bond yields
• U.S. bond yields can rise even if the U.S. Fed cuts rates, especially if inflation is a concern
• So, U.S. rate cuts do NOT guarantee lower Canadian mortgage rates
   

What About Variable Rates?

Variable mortgage rates in Canada are tied more directly to the Bank of Canada’s policy rate. So if the BoC cuts its rate, you will see variable mortgage rates go down.

But even here, just because the U.S. cuts doesn’t mean Canada will do the same.

Right now, the Bank of Canada’s rate is already lower than the Fed’s. The BoC has a different goal: to keep inflation stable, not to match what the U.S. is doing. And since inflation in Canada is more under control than in the U.S., the BoC might be able to cut rates more calmly over time.

Still, it doesn’t always move in lockstep with the Fed.

What Does This Mean for You?

If you’re a homebuyer or thinking about refinancing, this is important:

• Don’t assume that headlines about "rate cuts" in the U.S. mean better deals on Canadian mortgages.

The reality is that Canadian fixed mortgage rates depend heavily on bond market expectations - especially what investors believe about future inflation. And right now, that outlook is very uncertain.

That’s why many Canadians are still leaning toward fixed rates, even if they cost a bit more today, because they offer stability in a time of unpredictability. 

Final Thoughts:

Navigating today’s mortgage market can feel overwhelming, but you don’t have to go it alone.

Whether you’re buying your first home, refinancing, or renewing, it helps to have someone who can explain the market in plain language and help you make a confident, informed decision.

Key takeaway: U.S. rate cuts are not a guarantee of lower mortgage rates in Canada. Fixed rates here are influenced by bond markets, not just central banks. Always base your mortgage decisions on local conditions and your personal comfort level.

Got questions? Let’s chat! Email me at [email protected] or book a call at www.MortgageCall.ca