With the Bank of Canada at 2.50% after September’s cut and markets pricing more easing, the edge is tilting toward shorter fixed terms (1–2 years) and select variables for borrowers who can handle bumps. The call hinges on inflation’s glide path and your risk tolerance.
The Setup
- Policy rate: 2.50% (cut on Sept 17, 2025)
- Next decision: Oct 29, 2025 (with MPR)
- Inflation: ~1.9% headline (Aug), BoC core around ~3%
- Market pricing: Street expects 1–2 additional cuts by year‑end, which would take the overnight toward ~2.25%.
Fixed: The Case for Shorter Terms
- Bond yields have slid on softer growth, dragging 1–3 yr fixed offers into the mid‑4s.
- Stress test relief: Lower contract rates reduce qualifying hurdles (still 2% above contract).
- Flexibility: A 1–2 yr term lets you refi into lower rates if cuts continue in 2026.
- Who it fits: Renewers needing payment certainty in 2026–27; first‑timers who want predictable budgeting without getting stuck at today’s pricing for 5 years.
Variable: The Comeback Kid (Careful)
- Prime has followed the BoC lower; each 25 bps cut trims monthly costs by roughly $14–$20 per $100k.
- Upside: If the BoC delivers multiple cuts through mid‑2026, variables can win on total interest paid.
- Risk: If core inflation stalls near 3% or CAD weakens further, the BoC could pause, blunting variable savings.
- Who it fits: Borrowers with cushion (emergency fund), stable income, and appetite for payment swings.
What the Math Looks Like (Example)
- $600,000 mortgage, 25‑yr amortization
- 2‑yr fixed @ 4.59% → approx payment $3,348/mo
- Variable @ prime – 0.70% (assume 4.00% start) → approx payment $3,169/mo now; could drop $70–$120/mo if BoC cuts twice.
(Illustrative, not a quote; lender spreads vary.)
Strategy by Profile
- Risk‑averse: 2‑yr fixed; revisit in 2027 after the cutting cycle.
- Balanced: Hybrid (split fixed/variable) or 1‑yr fixed to keep optionality.
- Rate‑taker with cushion: Variable with prepayment plan; rerun the numbers after each BoC meeting.
Red Flags to Watch
- Shelter inflation stays hot → BoC slows cuts.
- Oil pops / weak CAD → imported inflation, stickier core.
- Mortgage spreads widen → lenders don’t pass along full yield declines.
Bottom Line
Shorter fixed terms are the default winner for most households heading into 2026. Variables can outperform if the BoC keeps cutting on schedule — just make sure your budget can stomach a bump if disinflation detours.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
