Where we are entering 2026
The Bank of Canada delivered nine consecutive rate cuts from June 2024 through Q1 2026, taking the overnight rate from 5.00% down to 2.50%. Inflation, which peaked at 8.1% in mid-2022, has been back inside the BoC's 1-3% target range for over 18 months. Real GDP growth recovered modestly through 2025, and the labour market normalized.
The remaining question entering 2026: does BoC continue cutting, pause at 2.50%, or — if global inflation re-accelerates — surprise the market with a hike?
What rate cuts have already done to mortgage rates
Mortgage rates don't move 1:1 with the overnight rate. The 5-year fixed rate is priced off the 5-year Government of Canada bond yield, which reflects market expectations of average rates over the next 5 years. Variable rates move directly with prime (which moves with the BoC overnight rate).
Since the peak in late 2023:
- 5-year fixed (insured): 6.04% → 4.79% (down 125 bps)
- 5-year variable: 6.20% → 4.30% (down 190 bps)
- 3-year fixed: 5.94% → 4.69% (down 125 bps)
- HELOC: prime + 0.50% = 5.45% (down 250 bps from peak)
Variable holders have benefited the most so far — full pass-through of BoC cuts.
Three scenarios for 2026
Scenario 1 — Continued gradual cuts (base case)
Forward overnight rate index swaps currently price 50-75 bps of additional cuts through 2026, bringing the overnight rate to 1.75-2.00% by year-end. If this plays out:
- Variable mortgage rates fall another 50-75 bps to ~3.55-3.80%
- Fixed rates likely fall 25-50 bps to ~4.30-4.55%
- The fixed-variable gap widens; variable becomes the clear math winner for new borrowers
Scenario 2 — BoC pauses at 2.50%
If inflation stalls between 2.5-3.5% and growth picks up, the BoC may pause. Outcome:
- Variable rates stay where they are; payment certainty improves but no further savings
- Fixed rates likely drift sideways or slightly higher as the bond market re-prices
- The fixed-variable decision becomes closer to a coin-flip
Scenario 3 — Surprise hike
A re-acceleration of inflation (US tariff shock, oil supply disruption, sustained CAD weakness) could force the BoC to reverse direction. Even a single 25-bps hike would:
- Punish variable holders immediately
- Push fixed rates 50+ bps higher as the bond market re-prices
- Validate borrowers who locked 5-year fixed at sub-5% levels
Most economists put this at less than 25% probability — but it's a real tail risk.
What this means for fixed vs variable
The classic Canadian fixed-vs-variable math centres on what the variable rate will average over the next 5 years vs the contracted fixed rate today.
Variable wins the math if your average variable rate over 5 years is lower than today's 5-year fixed. With variable already 50 bps below fixed AND markets pricing more cuts, variable currently has a head-start of roughly 75-100 bps.
Run your own scenarios in our fixed vs variable calculator — toggle the "variable move" slider to test how much BoC tightening would flip the answer.
What this means for your renewal
If you're renewing in 2026:
- Renewing variable → variable: stay the course if you can absorb rate volatility
- Renewing fixed → variable: consider the switch if your cash flow can absorb a 100 bps shock
- Renewing variable → fixed: only if payment certainty is psychologically essential
- Renewing fixed → fixed: shorter terms (2-3 year) may make sense if you expect rates to keep falling
What this means for first-time buyers
For buyers entering the market in 2026:
- Affordability has improved modestly vs 2023 peak (lower rates raise your qualifying ceiling)
- But house prices haven't dropped meaningfully — affordability gain is mostly rate-driven
- Variable + low rates make the next 5 years uniquely attractive for risk-tolerant first-time buyers
- Fixed remains the right call for borrowers near their qualifying ceiling
Common questions
Should I lock in a fixed rate now or wait for more cuts?
If fixed rates fall another 25 bps you save modestly; if they rise on a surprise you regret waiting. Most borrowers should lock when their cash flow allows and stop trying to time the bottom.
Does variable make sense at the renewal of an existing fixed mortgage?
Often yes, especially if your remaining amortization is long. The lower variable rate compounds for years; conversion to fixed mid-term is always available if conditions change.
What about 3-year vs 5-year fixed?
A 3-year fixed at 4.69% sounds worse than a 5-year at 4.79%, but if rates fall meaningfully over the next 36 months, you renew at a much lower rate. 3-year is often the better play in a falling-rate environment.
Bottom line
Heading into 2026, the rate path favours variable for risk-tolerant borrowers and 3-year fixed for those who want some certainty without locking too long. The Bank of Canada has done most of the heavy lifting; the last 50-100 bps of cuts is the question, not the direction.
Run your specific scenario in our mortgage payment calculator and the fixed vs variable calculator. For the full framework, read our fixed vs variable 2026 guide.