How Trump's Tariffs Could Impact Mortgage Rates in 2025

Tit-for-tat? Tariff-for-tariff?

"Just as Trump "intends to fill America’s coffers with tariff revenues," Canada "can do the same," suggesting that Canada could re-distribute the revenue generated by counter-tariffs to workers hard hit by a tariff war."

– Chrystia Freeland paraphrased in Toronto Star article, MacCharles, Jan. 17. 2025

Foreign Affairs Minister Joly recently suggested that job losses from Trump's threatened tariffs would first occur to "the sectors most vulnerable to tariffs include manufacturing, mining, the energy sector, agriculture and forestry," and have knock-on effects "on other sectors, like retail, education, and health care."

So, in response, the Canadian government is already proposing over $150B in retaliatory import tariffs if the U.S. follows through with its blanket tariff plan.

A significant trade disruption would cause Canada to experience input cost and supply chain shocks, especially if energy prices rise.

The result could be an immediately deteriorating economy with higher unemployment, weaker GDP numbers, reduced consumer spending, and increasing inflation.

(The U.S. might also face economic turmoil, including job losses and higher inflation.)

Would revenue from tariff retaliation be enough to cushion the tariff-induced inflation and job loss blow?

• Even with the additional revenue, Canadian consumers would face higher costs, which would erode disposable income and dampen economic growth.
• Tariff revenues are unlikely to fully neutralize the inflationary pressures because they do not directly reduce consumer prices.
• While tariff revenue can be redirected to support workers or industries through targeted programs, historically, it has generally been insufficient to fully compensate for widespread job losses or economic disruption.

Variable mortgage rates — flexibility in uncertain 'tariff' times.

The variable advantage: Interest rates would likely go much lower.

The Bank of Canada may be "forced into additional interest rate easing to the tune of 50–75 basis points (bps) [equivalent to 0.50-0.75% in rate cuts]."

– TD economics report delving into the ramifications of only a 10% U.S. tariff imposed on all Canadian goods, October 2024

Variable mortgage rates (and those for HELOCs) float and change along with the Bank of Canada's interest rate movements (which inform bank prime rates).

If the Bank of Canada needs to drill down its policy rate to prop up a tariff-weakened economy, variable rates could decrease further in 2025 than originally forecast (sans tariffs).

For homeowners, the result could translate into significant savings from lower mortgage payments (or reduction in amortization for those with fixed-payment variable mortgages) — a potential silver lining for those comfortable banking on the 'risk for change' posed by a variable rate choice.

However, let's take a closer look at inflationary pressures in the short term that could push back on interest rate policy until the full economic tariff impact takes effect.

Why wouldn't the BoC raise rates to combat higher 'tariff' inflation?

The BoC's sole mandate is to keep inflation to a 2.0% target. But this push-cost inflation would be superimposed on an already weakened Canadian economy (ironically, a result of recent higher rates imposed to tame inflation that went as high as 8.3% in June 2022). The central bank would shift its focus from fighting inflation to supporting the economy.

Historically, central banks have been cautious about raising rates to address escalating push-cost inflation. This approach risks exacerbating stagflation — a cycle of high inflation combined with economic stagnation and high unemployment. Higher rates would increase consumer and borrower costs and deepen the economic trench.

However, inflationary pressures and trade volatility on both sides of the border may still limit the BoC's ability to cut rates as quickly as the economy requires.

If demand tanks due to job losses, wouldn't that lower inflation?

The lowered demand may temporarily increase supply and business competition. Considering our economy is already in a state of excess supply, prices for certain goods could come down.

However, supply chains would experience interruptions, and businesses' input costs would ramp up quickly. At some point, companies would need to pass the costs to consumers to stay afloat.

Energy prices would probably be the first to increase. After all, the U.S. imports Canadian crude for almost 60% of its needs, with some re-crossing the border back into Central Canada (assuming this sector isn't carved out of tariff policy).

In response to tariffs, would interest rate cuts happen sooner, or later?

Trump's trade bluster likely contributed to a second BoC policy rate double-cut in December 2024 — a pre-emptive kickstart ahead of potential economic turmoil coming in the New Year.

At its January 2025 rate decision, the BoC will likely maintain its previous course and bring its policy rate to 3.0% (from 3.25%).

However, the odds increase for a first-quarter pause as it gauges market reaction and inflation progress in light of Trump's next Oval Office turn.

If tariffs become a fast reality, the cuts could start flowing once again.

In the short term, keeping a lid on demand-pull inflation.

The central bank could pause (versus raise) its policy rate in early 2025 to help keep a lid on demand-pull inflationary pressures in the short term. Plenty of those are going around that could complicate the BoC's decisions in the next few months (like a lower Canadian dollar, increasing oil prices, and U.S. inflation pushing 3.0% due to a stronger economy).

Fixed mortgage rates — stability amid trade and economic shifts.

Unlike variable rates, fixed mortgage rates are influenced by the bond market and set according to bond yields, which respond to market factors and fluctuations. This rate type doesn't follow interest rate changes but instead anticipates where they're going.

Fixed mortgage rates are the favourite choice of risk-averse homeowners, and many may stick with this choice during economic volatility despite any potential savings from variable rates.

The 5-year fixed rate would 'likely' come down in the face of full tariffs.

The standard 5-year fixed rate had been largely expected to maintain its current level for a while longer. It had lowered ahead of expected prime rate cuts, and the bond market is facing upward pressure by inflationary headwinds (such as a lowering Canadian dollar, a stronger U.S. economy, and recently higher oil prices).

However, if tariff threats become a reality, investors will likely seek safer assets, increasing demand for Canadian government bonds, which typically drives bond prices up and yields down.

If the Bank of Canada reduces its policy rate beyond current expectations to address a declining economy, yields and fixed rates would also go lower in 2025 than initially forecast.

But still be higher than a variable rate.

5-year fixed rates are usually higher than 5-year variable rates (including lender discount off prime) by a spread of about 0.25% to 1.0%. Variable rates are typically lower than fixed rates because of the increased risk of change.

This natural rate relationship flipped during the post-pandemic Bank of Canada's 'extremely fast' rate-hike cycle. As interest rates return to earth, these rate types will assume their historical spread relationship.

Keep in mind that typical lender 'discounts off prime' offered on variable rates may shrink during times of significant financial stress but are still likely to deliver mortgage savings over a fixed rate.

How would fixed rates behave with tariff on, tariff off?

Much more so than the variable rate (prime rate decisions occur only eight times a year), the 5-year fixed rate would register ongoing volatility if, instead of full-blown tariff disruption, there were 'negotiations' in tariffs along the way.

Market uncertainty would push bond yields around, and mortgage lenders would raise and lower fixed rates accordingly to keep their mortgage costs in line.

Wouldn't bond yields increase in response to tariff-induced inflation?

Again, because push-cost inflation affects the economy differently than demand-pull inflation, lowering interest rates would eventually reign over the bond market as investors turn to safer government bonds during a weaker economic print.

Could higher inflation in early 2025 raise Canadian fixed rates?

Yes, that's possible. Early on, the 5-year fixed rate could still be pushed higher by another 0.15%.

The 5-year Canadian bond yield has bounced around amid recent inflationary pressures and threats of economic instability. Bond yields could go higher in reaction to shorter-term pressures like increasing Canadian or U.S. inflation in the first few months of the year before blanket tariffs hammer the trade relationship.

However, fixed rates could also decrease slightly if a major trade disruption on both sides looks more certain.

The Smoot-Hawley Tariff Act of 1930: A great depression that seemed to end the trade tariff argument. Until now?

Until now, everyone thought the world trade community had learned its lesson from the 1930 World Trade War, which the U.S. Tariff Act started. The resulting (legendary) negative economic repercussions reverberated for decades.

Named after its sponsors, Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon, this Act intended to shield American farmers and manufacturers from foreign competition by significantly raising tariffs on a wide array of imported goods.

U.S. President Edgar Hoover signed it into law in 1930 despite warnings from economists and business leaders about its potential adverse effects.

• The Act raised tariffs on over 20,000 imported goods to historically high levels, with some duties exceeding 50% (like on Canadian wheat and dairy)
• Several countries, including Canada, responded with their own tariffs on U.S. goods, reducing international trade
• The global tariff war worsened the global economic downturn by disrupting trade flows and exacerbating conditions that led to the Great Depression, a severe economic crisis of the 1930s

1930 was a long time ago. The global trade economy is far larger and more interconnected today.

It seems hard to believe that a nation as powerful as the U.S. would entertain these types of trade restrictions (Canada is not the only country being targeted), risking a global trade war, or at the very least, one with a neighbouring country, at the expense of economic growth and prosperity.

So, we take a measured (mortgage) outlook and wait to see if the bluster becomes a blatant reality.

Mortgage Rates in 2025 — no tariffs, with tariffs, or somewhere in between.

For those of you who regularly tap into our 2025 Mortgage Rate Forecast blog — which features insights from True North CEO Dan Eisner and continually updated economic factors and numbers — follow along as we outline the political maneuverings and try to predict the (mortgage) rate road ahead.

If tariffs don't materialize — We'll keep watching inflation and other factors and hopefully see the Bank of Canada further lower its policy rate this year. How far interest rates will go (to the neutral rate or beyond) will depend on stimulating economic growth while likely contending with stronger U.S. growth.

If tariffs come on full board — How long they stay could completely change the economic outlook for 2025, and lower interest rates are likely to soon follow.

If tariffs land somewhere in between — Not all goods, not all 25% tariffs? Then, it's back to one month's economic readings at a time to assess the impact and where the Bank of Canada would take its policy rate from there.

In this case, the Bank of Canada's interest rate decisions would become more complicated as it seeks to tamp down inflation while encouraging healthy consumer demand.

True North has been jackhammering mortgage rates for over 18 years.

We exist to help you save on mortgage rates. And for you to have a better option than just caving to your big bank.

Tariffs or no tariffs, wherever the economy takes us, our highly trained, salaried (non-commissioned) brokers are well-positioned to offer discounted rates, exceptional free service, fewer fees, and less costly penalties.

You can count on a simple process and unbiased advice to outline clearer choices.

Through this time of uncertainty, we're here to help answer all your questions — and help you continue along your (mortgage) way.

Give us a shout, anywhere you are in Canada. Our fast, simple, free service is available online, by phone or email, or at a store near you.