What's going on with mortgage rates in 2025?

Dan Eisner's Rate Prediction

As we endure the wintery weather, Canadian economic conditions are just as frosty.

Despite the Bank of Canada slicing down interest rates towards year-end 2024, we're in an economic cooldown amid a state of excess supply brought about by weakening demand.

As the long period of restrictive interest rates crystalize their icy spread up through months of lagging indicators, this imbalance could further erode Canada's economic growth (already predicted to be meagre, at best).

Canadian household debt loads remain unsettlingly high, budgets are straining, labour markets are weakening, and consumer spending and business confidence are relatively gloomy.

Here are some economic factors playing into this rate-cut cycle.

Canada's headline inflation rose in October. But no need to panic (yet).

Inflation rose for the first time since May 2024, up from September's 1.6% to 2.0% in October — but still in line with the BoC's target. The core inflation average also increased to 2.6% (from 2.4%), which is the wrong direction but not outside the expected price volatility.

October's reading is primarily due to base-year effects for gas (more contrast in price increases for this CPI component between this and last year). Grocery prices are still increasing at a faster pace than the headline at 2.7%, but stripping out higher shelter costs brings the inflation rate down to just 0.9%.

Lowered inflation doesn't mean things are suddenly cheaper for Canadians. According to Stats Canada, in September 2024:

• Compared to September 2021, the CPI rose 12.7%
• Rent was +21.0% costlier nationally
• Food purchased from stores was +20.7% more expensive, increasing substantially during this same 3-year period

Weakening Canadian labour market.

The November unemployment rate rose to 6.8% (from 6.5%), the highest point since January 2017 (not including the pandemic years of 2021-22), and the sharpest rise in 8 months.

While a gain of 50K jobs (more than the 25K expected) may seem impressive, 45K were public sector jobs which don't fuel the economy like private job creation. Many more unemployed started looking again during November (the participation rate edged up) but did not meet up with hiring intentions.

Wage inflation dropped to 4.1% (from 4.9% last month) — but is still considered too high, with inflation back within target. Private sector wage inflation is a tamer 2.7%, in line with the current labour market weakness, but civil servants (non-business sector) are still seeing pay increases of 6.3% over the past year.

Economic growth projected to underwhelm.

With September coming in at a paltry growth rate increase of 0.1% and Q3 GDP (Gross Domestic Product) at only 1.0% — undershooting the BoC forecast of 1.5% — there's bound to be concern about sparking more churn ahead of next year's potential U.S. tariff developments and growth optimism.

Canada's per capita GDP in 2024 also fell for the 6th straight quarter — far below our economic potential. And productivity? Canada's business sector output contracted by 1.5% in Q3 2024 (the 9th quarterly drop) compared to the U.S.'s increase of 2.2%.

Warming Canadian housing markets?

National housing market sales warmed this fall in response to the recent BoC rate cuts; home prices are still relatively stable for now.

Declining interest rates are sure to bring more housing activity this coming spring. Too-hot home sales and resulting price pressures are a concern, as they could cancel out the cooling effect of lowering rates for the 'shelter cost' component of the CPI (Consumer Price Index) basket. Not to mention the impact on home affordability, which has only recently improved.

Will new mortgage rules recently dropped by the federal government also help spur more buying activity into Spring 2025?

U.S. economy and rate-cut pace.

Like it or not — our countries' economies are closely linked, including the impact of the two rate agendas on the Canadian dollar.

With an incoming Trump presidency, here are some current concerns:

• U.S. economic growth may quickly accelerate and cause supply and demand shocks to increase U.S. (and Canadian) inflation once again
• U.S. tariff threats of up to 25% on Canadian imports could devastate economic growth here (Canada does about 75% of its export business with the U.S.), which would complicate the BoC's job of spurring the economy while keeping a lid on inflation
• Immigration issues between the two countries may impact our labour markets, diminishing productivity even more
• The Canadian dollar has already declined to near 4.5-year lows against U.S. currency as a chorus of 'extreme growth' filters up through U.S. political agendas and business outlooks

The U.S. Fed has a dual mandate of maintaining lower inflation and a strong job market (vs. the BoC's sole 'inflation' mandate). If the Fed is forced to hold off on further rate cuts for a time with a revving economic engine, it could open up a more significant rate spread between the countries (more than 1.0%) for a negative and inflationary effect here, including a lower CDN dollar.

Despite the abovementioned concerns, the previous Trump presidency valued lower interest rates and inflation — so time will tell how the transition will shake out for Canadians at the kitchen table.

The BoC's Dec 11 rate decision helps speed the way to the neutral rate.

The latest weaker jobs report likely tipped the central bank's decision in favour of a second consecutive double-cut — though the BoC had contrasting data to sift through, making its decision harder this time.

Coming down a whole 1.0% in just a couple of months, the BoC is trying to ease rate pressure by getting closer (faster) to an economic 'neutral' rate.

The problem with faster policy rate cuts is a potentially wider divergence with the U.S. Federal Reserve's rate agenda if they don't soon follow suit. More than a 1.0% rate difference has an inflationary effect on the Canadian dollar, not to mention the new inflationary and growth concerns in light of U.S.-related drama on the horizon.

But these faster cuts may help kick-start the economy earlier, ahead of an economically uncertain 2025.

Where will rates go in 2025?

I predict another 0.75% in BoC rate cuts by the end of 2025.

Assuming inflation continues to toe the line, BoC rate drops of at least 0.25% per meeting will likely resume through Q1 of 2025.

For months, I held a forecast of Canadian prime rates falling from peak by about 1.5% into the first quarter of 2025 and continuing to fall another 0.50% — for a 2.0% drop in total (to a 3.0% BoC resting rate).

I recently revised that forecast for a resting BoC rate of 2.50% for a total prime rate drop of 2.5% by the end of 2025, and I'll hold it there until we see how markets (and nerves) settle from the recent U.S. election news.

What is the neutral rate?

Many economists currently gauge the BoC neutral rate to be around 2.75-3.0% (where the economy is neither stimulated nor repressed), and rates might need to go lower to stimulate an economy dragged down by an intense hike schedule over two years.

Is there a danger that the prime rate could increase?

There's always that danger, though the widespread economic softening already underfoot makes it unlikely for at least the next few months as rate cuts work their way through the economy.

A year from now, we hope to have much lower rates and wonder where the economy will go from there.

Snapshot of factors affecting rate decisions.

Cooling numbers all around will keep the Bank of Canada on its current rate-cutting course:

• Coolio? (Inflation) – October's headline annual inflation rate increased by 0.4% to 2.0% (from 1.6% last month) — still within the BoC's target range; core inflation (median and trim average) also rose to 2.6% from 2.4% (next reading Dec 17)
  
  
• Colder (Jobs) – Canada's November labour market cooled again as the unemployment rate rose to an almost 8-year high of 6.8% from 6.5% (excluding the pandemic); a gain of +51K jobs (up from September's +15K) wasn't enough to move the labour needle, there weren't enough jobs to absorb the numbers seeking work (next reading Jan 10)
  
  
• Colder (Wages) – November's average wage growth dropped significantly to 4.1% (from October's 4.9%); this (truly) lagging indicator supports the view that inflationary pressures are easing (next reading Jan 10)
  
  
• Lukecool to the touch (Economic growth) – September's GDP rose by a meagre 0.1% in September, after a flat August, and with another 0.1% increase projected for October; Q3 has come in at 1.0% growth, lower than the BoC's revised forecast of 1.5% (down from a prediction of 2.8%) (Oct's reading on Dec 12)
  
  
• Warm like a cup of hot cocoa (Bond yield market) – Canadian 5-year bond yields have increased (again) to 3.0% following the BoC's 'lack of emphasis' on further rate cuts, higher producer prices in the U.S., and last but not least, Trump's tariffs threats (that are looking less threat-like and more like reality-like); we wait to see the impact of next week's CPI report

What happens if too many factors are showing heat? Then we start looking for the BoC to pause rate cuts — though hopefully not until after interest rates have come down to a respectable level to achieve economic momentum (and balance).

Are fixed rates coming down?

Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates and are the reference in this section and blog.

Fixed rates aren't likely to budget much in the next while.

Canada's 5-year bond yields are back up around 3.0%. The Bank of Canada suggested that the latest policy rate double-cut (of 0.50%) may be a cause for holiday celebration, but the (rate) way forward in 2025 is looking foggier; perhaps a couple more 0.25% cuts are coming as we wait for the Trump train to run over Canada's trade agreements with imposed tariffs.

On the whole, fixed mortgage rates had already declined ahead of these expected prime rate declines. With this latest bond yield volatility (longer-term yields have steepened the curve), fixed rates aren't likely to ease soon — though you may see lender specials on specific term rates.

If yields jump up, look for a (delayed) fixed rate increase. Lenders are closely watching their costs and retaining capital to address the potential for increasing debt arrears.

Could fixed rates fall more as the prime rate drops?

Fixed rates have made their main declines, and the recent market jolts may hold them to a tight range for a while longer. Rate agendas are clouded with uncertainty as we move through a U.S. government transition and a potential Canadian election.

If markets and inflation remain calm, a 0.25% fixed-rate decline may be possible over time — if the BoC policy rate comes in below the neutral rate (currently considered to be around 2.75%) before the end of 2025.

Currently, variable rates (which float with changes to bank prime rates) still have more room for decline than fixed rates. The 5-year variable mortgage rate will eventually move lower than the stalwart 5-year rate, which is the 'normal' state of rate affairs — typically lower by a spread of about 0.25% to 1.0% because of the increased risk of change.

We may see the best 5-year fixed rates stabilize into the high 3's as prime rates make their way down to a more typical spread relationship.

Get a rate hold now!

If you're considering buying a home or renewing sometime in the next few months, talk to one of our expert brokers about getting a rate hold. It could protect you from rate volatility, and you'll still get a lower rate if it goes down during your hold.

Can the U.S. economy affect rate hikes here?

The U.S. economic landscape was finally relenting to the pressures of higher rates, with declining inflation and a more downtrodden jobs market than they've seen in months. However, recent numbers have improved, and another double-rate cut is unlikely.

A U.S. government transition has thrown some uncertainty into how both economies will fair as we go.

Why do we care? Economic conditions south of the border can pile on factors weighed by our central bank (and drive higher prices here) to affect its rate decisions.

Will Canada see a recession?

Despite the constant, distant calls of the 'recession' loon, it hasn't yet flown into our backyard. That doesn't mean the trajectory for a soft landing — meaning no recession or a very mild one — is an absolute. Nothing is ever certain in love or economics.

Back in October 2023, the Bank of Canada referred to projected economic faring as 'low positive growth' that will walk the line and possibly dip into negative territory (but not as a full-blown 'recession'). So far, that's coming true, with a 2024/2025 GDP skimming above the line.

There's optimism that market resilience might keep our economy out of recessionary territory. Experts had projected a mild recession through the first half of 2024, which did not materialize. However, these higher rates are still working through the economy, and coupled with new uncertainties (mostly the U.S.'s impact on growth and trade agreements), we may yet see recessionary conditions creep into 2025.

Our labour market is showing broader signs of system stress, household budgets are straining under the higher prices all around, and a wall of mortgage renewals upcoming in 2025 and 2026 will further test discretionary spending.

A recession would bring mortgage rates down faster.

If economic weakening accelerates beyond expectations, the BoC would drop prime rates faster, providing more budget relief when we'll likely need it most.

Stagflation isn't expected to stick a landing.

Stagflation, a period of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. According to the BoC, "it's not where we are now" as our inflation isn't high enough, having come down to around 2% from over 8%, and an unemployment rate still within the 6's range.

Mortgage rule changes coming soon will offer more help to home buyers and owners.

Along with an anticipated period of declining interest rates, a spate of new mortgage rules should help improve affordability for some home buyers and enable more homeowners to save on their mortgage renewals:

• Federal banking regulator, OSFI (Office of the Superintendent of Financial Institutions) lifted its stress-test requirement for 'straight' uninsured mortgage switches at renewal (meaning no changes in the mortgage balance and amortization).

Effective December 15, 2024:

• An increase in the home-price cap from $1M to $1.5M for insured mortgages (for primary and secondary home purchases, not investor purchases) allows less than a 20% down payment in more expensive markets.
• First-time and all new-build buyers can extend an insured mortgage to 30 years from the standard 25-year amortization, which could lower mortgage payments and improve stress-test qualification.

Starting January 15, 2025

• Eligible homeowners can access an insured refinance for up to 90% of their 'improved property' value (capped at a $2M home value) for construction funds and extend to a 30-year amortization.

Does True North anticipate an increase in mortgage activity?

Lowering interest rates, mortgage rates, and some home prices improved affordability in 2024. Towards year-end, more Canadian home buyers and owners started to wade back in and get ahead of a potential spring housing market rush as prime rates ease off and variable rate discounts grow.

As always, we offer great rates and specials, and we're attracting many mortgagees who look to lower their monthly costs while taking advantage of housing deals in their area.

There are mixed predictions about how lowering rates will affect housing prices. More sellers are listing to get out of restrictive rates, yet markets still have plenty of potential to skyrocket in demand due to the highest immigration numbers Canada has seen in years.

Rates and home prices are still elevated enough for some to consider delaying their buying intentions until 2025, when the mortgage stress test will be even lower (as the prime rate continues to lower into the new year).

Depending on your details and needs, our low short-term fixed Rate Relief™ product can help you bridge the gap with budget relief now, enabling your dream home purchase sooner, with the hope of renewing into lowered market rates.

Read more here about how high mortgage rates may impact the 2025 housing market.

My mortgage advice for 2025?

Shop for your best rate — and consider a variable one.

Around 2M Canadians are coming up for renewal within the next couple of years. Even if rates continue to go down into 2025, homeowners will still take a budget hit by renewing into higher rates.

The most important thing you can do in this market is shop around for your best rate and product. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage.

We exist to do the comparing on behalf of our clients, checking with several accredited and alternative lenders for the best solution and budget fit for their needs, while passing along a volume rate discount. We're fast, we speak several languages, and we're very good at what we do — which is why we have so many 5-star reviews.

First-time home buyers especially need expert advice to set them on a path to successful homeownership amid these price pressures.

Which rate should you choose? Variable rates are trending down and can offer instant budget savings at each rate cut versus locking into a 5-year fixed rate and watching rates drop from the sidelines. You can always lock into a shorter fixed rate if you get too nervous.

Owning a home is a tremendous source of pride in Canada. I created True North to provide clients with a better mortgage experience and save them thousands with their best rate and mortgage choice.

Have questions about your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 15,000 5-star reviews from our happy clients.