What's going on with mortgage rates in 2024?

Dan Eisner's Rate Prediction

As the wintery weather settles in, Canadian economic conditions seem just as frosty.

That doesn't mean inflation will continue to head down every reading. October's overall CPI increase of 0.4% from last month isn't a cause for alarm unless the trend continues; there's the expectation that the CPI will fluctuate within the BoC's target range.

The Bank of Canada has cut its policy rate (the overnight benchmark rate banks use to loan each other money and the rate which informs most other interest rates) by 1.25% since June 2024. Yet borrowing costs remain unsettlingly high, straining household budgets, cooling labour markets, and dampening consumer spending and business confidence.

We're seeing an economic cooldown amid a state of excess supply, with more produced than consumed. As 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 tepid, at best).

That's not good news — though a silver lining could be faster (and deeper) prime rate cuts from the BoC.

And what could knock Canada off its current rate-cut agenda? A repeat Trump U.S. presidency is already threatening a looming economic storm cloud.

For example, if the U.S. economy (and its fiscal debt) grows hotter than expected in 2025, trade tariffs are imposed on Canadian imports, and the Canadian dollar suffers, our inflation and GDP could be adversely affected enough to impact our (rate) way forward.

The 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 0.9%.

Keep in mind that just because Canada's pace of average price increases is within the BoC's target range, that doesn't mean things are suddenly cheaper for Canadians. According to Stats Canada, in September 2024:

• Compared to last 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 October unemployment rate remains unchanged from last month at 6.5%, but the underlying numbers don't exude 'stability.'

With a gain of 15K jobs (less than the 27K expected), the total jobs created didn't (once again) match up to the continued brisk pace of Canadian population growth and growing labour force, with an employment rate that's been on a downward trend since February 2023.

Wage inflation also gained 0.3% to 4.9% in October (from 4.6% last month) — an upside surprise that is sure to bug inflation watchers but, as a lagging indicator, is unlikely to sway the BoC from its current rate-decline mood.

Economic growth is projected to underwhelm.

Despite a slight uptick in Q2, GDP (Gross Domestic Product) forecasts for the rest of 2024 have the winter blues, with higher rates nipping at growth, especially in goods-producing and manufacturing sectors. The Bank of Canada has revised its Q3 prediction downward to 1.5%, but the reality expects to undershoot that figure.

The BoC stakes its 2025 growth projection at 2.1%; economists expect a much lower print of around 1.5%.

Canada's per capita GDP also fell again for the 5th straight quarter in 2024 — already far below our economic potential, considering the population increases our nation has seen in the last couple of years.

Warming Canadian housing markets?

National housing market sales are finally thawing in response to the BoC rate cuts and a surge of new listings in September; home prices are still relatively stable for now. Sudden housing fervour could add to the shelter cost inflation basket and work against the rate cuts to halt or pause them.

Will new mortgage rules recently dropped by the federal government spur more housing activity ahead of Spring 2025?

The potential for economic jump-scares is never completely out of sight:

• If Canada's rate agenda diverges by more than 1.0% from the U.S. Federal Reserve, it could impact our dollar for an inflationary effect
• Oil prices cracking the $100 ceiling due to global conflict or increased demand would raise business input costs that could be passed on to consumers (currently, oil prices are nowhere near that height)
• Impacted supply chains due to global conflict, weather events, labour strikes, or trade wars could result in higher input costs passed onto consumer prices

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, some experts caution that U.S. economic growth may rev up, and 'immigration and tariff proposals' and implied tax cuts could result in supply or demand shocks that increase U.S. (and Canadian) inflation once again.

(U.S. economic growth could also positively affect Canadian growth, but higher inflation would complicate things.)

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, it could open up a more significant rate spread between the countries for a negative and inflationary effect here and on the CDN dollar.

Just because the economy is humming in the U.S. doesn't mean we'll do the same here, especially if tariffs (duties imposed on imported or exported goods) of 10-20% are introduced. Canada does about 75% of its export business with the U.S., and interruptions and higher prices could significantly slow growth.

That means the Bank of Canada may have to weigh combating higher inflation vs. sparking the economy when deciding on rate cuts in 2025 and beyond.

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.

What will happen at the next rate meeting on December 11?

With one double-cut slipped under the door, some experts call for another such move at the last BoC meeting of 2024.

I'm not ready to go beyond another 0.25% cut for that decision. Rates need to come down, but going too fast risks flaring inflation once again — especially with new U.S.-related concerns on the economic horizon.

(We've seen a quadruple hike of 1.0% in Canada during the past two years, though that sizable jump down is less likely to happen.)

Where will rates go in 2025?

I predict another 1.25% 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 next year 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.

The neutral rate?

Many economists currently gauge the BoC neutral rate to be around 2.75% (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.

What can affect BoC's rate decisions?

Our central bank wants to see cooling numbers all around to continue its rate drop cycle:

• Cooling? (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)
  
  
• Cooling (Jobs) – Canada's October labour market was little changed: the unemployment rate was flat at 6.5%, but a gain of +15K jobs (down from September's +47K jobs created) wasn't enough to overcome continued population growth and broader deterioration seen (next reading Dec 6)
  
  
• Warming (Wages) – October's average wage growth surprised to the upside with an increase to 4.9% from September's 4.6%, triggering a nervous tick in those watching inflationary factors (next reading Dec 6)
  
  
• Lukewarm to the touch (Economic growth) – August's GDP reads essentially unchanged, following a 0.1% increase in July, and September is looking to track a 0.3% rise; Q2 GDP surprised higher at 2.1%, but Q3 forecasts coming in lower than the BoC's revised forecast of 1.5% (down from a prediction of 2.8%) (Sep and Q3 reading on Nov 29)
  
  
• Warm-ish (Bond yield market) – Canadian 5-year bond yields are up to 3.3% after the latest 'warmer' October Canadian inflation reading, as well as higher producer price increases and retail spending than expected; add to that, a GST holiday coming that will likely impact rate cuts, and signs of inflationary pressures emanating from the U.S., such as potential U.S. tariffs on Canadian exports

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 trend down for the time being.

Canada's 5-year bond yields are up to 3.3% after October's 'warmer' Canadian inflation reading and signs of increasing inflationary pressures both here and in the U.S. — such as unexpected increases in producer prices and retail spending.

Add to that, the Canadian federal government is adding a GST 'holiday' for certain goods and services, which could very likely impact the BoC's rate cut agenda at some point and keep upward pressure on bond yields.

Also, with a repeat Trump presidency announcement comes apprehension on this side of the border over proposed tariffs of 10-20% (duties on importing and exporting goods), which might considerably ding Canadian economic growth while leading to higher inflation, with over 75% of our exports going to the U.S.

Details are piling on that aren't necessarily favourable to easing interest rates, and bond yields had already come down ahead of the foretold BoC policy rate cuts. So, unless something happens to swing market sentiment the other way, don't look for bond yields and fixed mortgage rates to decline substantially in the next while.

But as fixed rates hang out in bond-yield limbo, 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 deal with the potential for increasing debt arrears.

Is there room for fixed rates to fall 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, especially if 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, there may be room for a 0.25% fixed-rate decline over time if the BoC policy rate comes in below the neutral rate (currently thought to be a policy rate of around 2.75%) by the end of 2025.

Variable rates (that float with changes to bank prime rates) have more room for decline than fixed rates. They're still currently higher than the stalwart 5-year rate, which isn't normal. Usually, variable rates are lower than fixed at a spread of about 0.25% to 1.0% due to 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 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, sustaining these higher rates for too long may jeopardize the soft landing.

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 3% from over 8%, and with a (still) relatively low unemployment rate.

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) lifts its stress-test requirement for 'straight' uninsured mortgage switches at renewal (meaning no changes in the mortgage balance and amortization).

Starting 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) will allow 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 will help 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?

The higher rate environment has dampened affordability. Even though many Canadian home buyers and owners are holding off on plans to buy or move, some are finding deals to get ahead of a potential 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 lowers over the coming months).

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 2024 housing market.

My mortgage advice for 2024?

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.