What's going on with mortgage rates in 2025?

Dan Eisner's Rate Prediction

Despite the Bank of Canada reining in interest rates in 2024, Canadian economic recovery is still a chicken roaming around the woods at night (trying to avoid U.S. tariffs, aka lions and tigers and bears).

As the long period of restrictive interest rates works its way forward, the BoC is still in a strong position to lower its policy rate further — as it contemplates a weaker economy that will help push back against other inflationary pressures, such as the lowering dollar (currently trading just below 70 cents U.S. and expected to go lower) and a strong U.S. economy.

(The recent G.S.T. holiday will skew inflation numbers for a couple of months, but the BoC will look beyond that for inflation's progress.)

Canadian household debt loads remain unsettlingly high, budgets are straining, labour markets are still weaker despite one better month, and consumers and businesses are in hand-wringing purgatory, waiting for a boom to hit.

That 'boom' is returning U.S. President Trump, now coupled with an outgoing Canadian Prime Minister Trudeau. Policy rumours and warnings are running amok. Trump's threat of 25% tariffs on Canadian goods looks less threat-like and more impending, though political bluster makes it less clear as to what the actual outcomes may be.

Read more here on how Trump's tariffs could alter Canada's interest rate path this year.

The BoC's rate-cutting course will need to navigate through increasing complexity as our two countries' politicos stampede their way through 2025.

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

Despite a G.S.T. dip in December, Canada's inflation is seeing upward pressure behind the scenes.

On the surface, headline inflation in December was down to 1.8% (from November's 1.9%), though it was mainly due to the federal government's G.S.T. Holiday (running from Dec. 14 – Feb. 15) reducing certain price components. Excluding food (the most 'G.S.T' affected component), inflation rose at a pace of 2.1%.

The core inflation average also dipped to an expected 2.45%. However, the BoC's favoured metric, the 3-month core inflation rate, rose for the 5th straight month to 3.5%, above its preferred range.

A 'better' Canadian December labour market print.

The December unemployment rate declined to 6.7% (from 6.8%), surprising analysts who expected the unemployment rate to tick up to 6.9%, and a gain of 91K jobs (more than the +25K expected) was across several industries.

The employment rate increased for the first time since January 2023 (by 0.2% to 60.8%). Wage inflation also dropped further to 3.8% (from 4.1% last month) — notching the slowest month-over-month growth since May 2022.

These numbers offer Canadians some hope on the jobs front but also put the potential for increasing inflation back on the BoC's rate-pause table.

Economic growth is bumping along and projected to underwhelm.

While October's growth was slightly better than expected, at +0.3%, November's GDP has contracted so far. For the last quarter of 2024, the BoC had already dropped its forecast to 1.5%, and 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 Q3 2024 per capita GDP 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 increase 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 this 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 (and Canada's expected retaliations) could devastate our economy (Canada does about 75% of its export business with the U.S.), which could uncomplicate the BoC's job rate cuts decisions, with an outsized need to spur the economy
• Immigration issues between the two countries may further diminish our labour productivity
• 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.

If that rate spread coincides with growing economic heat here in Canada, the BoC may need to consider rate pauses and even potential hikes if demand-pull inflation rises too quickly, too soon. However, there is still significant slack in our economy, giving the central bank room to assess the situation amid U.S. policy changes (increasing rates seems counterintuitive at this time).

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 Canadian wallets.

Will the BoC cut rates again on January 29?

Prime rates came down significantly in 2024, and markets have now gauged an 80% chance of another single cut at the BoC's first rate meeting in 2025, which I think will happen.

Having said that, the central bank has much to consider in deciding whether to post another cut or pause to consider it — including the ramifications of a potentially wider divergence with the U.S. Federal Reserve's rate agenda if Canada keeps cutting rates and the U.S. doesn't (more than a 1.0% rate difference has an inflationary effect on the Canadian dollar).

Where will rates go in 2025?

I still predict another 0.75% in BoC rate cuts by the end of 2025 (assuming no tariffs).

Despite all the complications (and outside of potential tariff mayhem), assuming inflation remains tamed amid our too-sluggish Canadian economy, BoC rate drops of at least 0.25% will likely continue during the first half of 2025 (it's too soon to tell whether those would be consecutive drops or if a pause will extend the timeline).

I believe the BoC's policy rate isn't 'neutral' enough yet. I'm holding out a forecast for a resting BoC rate of 2.50% — for a total prime rate drop of 2.5% by the end of 2025. Some experts have pegged a BoC resting rate of 2.0% in 2025 to spark our economy in light of trade turmoil, though too many brambles lie along that prediction lane at the moment.

We'll see how markets (and nerves) progress as the year's political drama plays out.

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, and although the economic softening already underfoot makes it unlikely, the crystal ball's in the air for how this year's economy will land.

Snapshot of factors affecting rate decisions.

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

• Lukewarm (Inflation) – December's headline annual inflation rate took a 'G.S.T. Holiday' dip to 1.8% (from last month's 1.9%); core inflation (median and trim average) also cooled to 2.45%, but the BoC sees price pressure building (next reading Feb 18)
  
  
• Not as arctic (Jobs) – Canada's December labour market heated slightly to finish off 2024, with the unemployment rate lowering to 6.7% from 6.8% with an unexpected generation of +91K jobs across several industries (+25K were expected; November added +55K) (next reading Feb 7)
  
  
• Colder (Wages) – December's average wage growth dropped again to 3.8% (from November's 4.1%), the slowest average wage growth rate since May 2022 (next reading Feb 7)
  
  
• Lukecool to the touch (Economic growth) – October's GDP rose by 0.3% after a 0.1% gain in September, though a contraction is on tap so far for November; 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%) (Nov's reading on Jan 31)
  
  
• Iced coffee (Bond yield market) – Canadian 5-year bond yields are back up to the 3.0% range following a Canadian inflation December inflation report that didn't look as good under the hood as the shiny surface; potential double 'T' trouble (incoming Trump and outgoing Trudeau) means economic uncertainty in the short-term is likely to pressure yields until more tariff info is at hand

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.

Yield volatility to keep upward pressure on fixed rates — for now.

Canada's 5-year bond yields are back up to the 3.0% range after a lower December Canadian CPI print of 1.8% (taking a G.S.T. holiday dip from last month's 1.9%), even though the 3-month core inflation metric favoured by the Bank of Canada rose above its preferred range.

Market uncertainty is likely to keep upward pressure on yields until more is known after returning-President Trump's first few days in office.

The (rate) way forward in 2025 is thickly fog-covered, with a few cows on the rails, to say the least. We wait to see whether the Trump train will, in fact, blast through Canada's trade agreements with imposed tariffs and gauge Canada's response.

Overall, fixed mortgage rates had already declined ahead of another 2 or 3 expected prime rate cuts from the Bank of Canada. With the latest bond yield volatility (longer-term yields have risen), fixed rates aren't likely to ease much — though you may see lender specials pop up on specific term rates.

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

Could fixed rates increase even as the prime rate drops?

Current fixed rates have already largely factored in another 2 to 3 BoC prime rate cuts, potential tariffs notwithstanding. Recent market jolts and future uncertainty may hold them to a tight range for a while longer. Short-term inflation concerns may yet show up in yields, which could push 5-year fixed rates up by around 0.15% over the first quarter of 2025.

If bond yield calm reigns (and so does the economic turmoil), a 0.25% fixed-rate decline may be possible over time if the BoC policy rate falls 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 projected 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 likely drop prime rates faster (depending on inflation), 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 most 'straight' uninsured mortgage switches at renewal (meaning no changes in the mortgage balance and amortization). That doesn't mean all banks will follow suit, but they now have the option.

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 are 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 elevated enough for some to consider delaying their buying intentions until 2025 when the mortgage stress test could 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 than they had.

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 the most 5-star reviews in the industry.

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.