A stark warning is being issued to Canadian homeowners who recently opted for variable-rate mortgages: the financial relief sought in 2025 could transform into significant peril by 2026. According to a new report from Desjardins Group, the shifting economic winds and market expectations for future interest rate increases pose a serious risk to those who piled into variable mortgages this year.
The Allure of Variable Rates in 2025
Canadians have been flocking to variable-rate mortgage products in 2025, drawn by their lower initial rates compared to fixed options. Hendrix Vachon, principal economist at Desjardins, noted that while five-year fixed mortgages have traditionally been the preference, variable options have been gaining significant popularity since 2024.
Data from the Bank of Canada underscores this trend. By October, variable-rate mortgages accounted for an estimated 38 per cent of new mortgage financing. Furthermore, they made up roughly 32 per cent of total outstanding mortgages. This represents a dramatic turnaround for a product that saw its rates swing from a pandemic-era low of 1.5 per cent to a painful high of 7.48 per cent during the Bank of Canada's aggressive inflation-fighting cycle.
The rate differential has been a key driver. At the end of October, the interest rate for variable-rate mortgages stood at 3.97 per cent. This was notably lower than the 4.21 per cent average for all insured residential mortgages and the 4.39 per cent for five-year-and-above fixed mortgages.
Why 2026 Could Bring a Reckoning
The danger for these borrowers lies in the changing outlook for monetary policy. The Bank of Canada has signaled it is done cutting interest rates for the foreseeable future. The central bank's benchmark lending rate currently sits at 2.25 per cent. However, both financial markets and economists are increasingly betting that the Bank's next move will be an increase, not another cut.
"The recent enthusiasm for variable-rate mortgages may wane in 2026, especially if borrowers start anticipating new rate increases," Vachon cautioned in the report. He emphasized that the outlook for 2026 is currently less favourable for variable rates.
Unlike fixed mortgages, where the payment remains constant, variable mortgage rates are tied directly to the lender's prime rate, which moves in lockstep with the Bank of Canada's policy rate. While borrowers often negotiate a discount off the prime rate, their payments still fluctuate when the central bank changes course.
Market Forecasts and the Neutral Rate
Market pricing suggests there could be one rate increase by the end of 2026. Desjardins' own official forecast is slightly more conservative, calling for two 25-basis-point hikes in 2027 and none in 2026. However, the underlying pressure comes from estimates of the long-term neutral rate.
The neutral rate is the theoretical borrowing cost that neither stimulates nor restricts the economy. Current estimates place this rate at 2.75 per cent, which is a full 50 basis points higher than the Bank of Canada's current benchmark. This gap suggests underlying upward pressure on rates over the medium term.
Vachon warned that if variable-rate mortgages become more expensive, the trend in borrower preference will likely shift again. He expects more homeowners will opt for three-to-five-year fixed-term mortgages, which have already overtaken the classic five-year fixed in popularity. These medium-term fixed products accounted for less than 20 per cent of all mortgages before the pandemic but jumped above 50 per cent in 2024, remaining near 40 per cent currently.
The message from Desjardins is clear: the calculus for Canadian homeowners is changing. The short-term savings offered by variable rates in 2025 could be quickly erased if the Bank of Canada resumes its hiking cycle, leaving those who timed the market incorrectly facing higher payments and increased financial stress in the year ahead.
