What's going on with mortgage rates in 2025?

Dan Eisner's Rate Outlook 2025

Will the BoC cut interest rates again on April 16?

Prime rates affect variable mortgage rates, and fixed mortgage rates are set by the bond market.

If the current trade war turmoil, reignited on April 2 by Trump's 25% Canadian auto tariffs, has any say, the April rate announcement will pull heavier towards a rate cut rather than a pause.

The BoC is now in a tug-of-war, choosing between economic weakening already underway (and that to come) and warming inflation from tariffs (the central bank noted these concerns in comments delivered with its latest rate cut).

Trade turmoil. Trump's constant shifting of his (aggressive) position and Canada's retaliation with its own tariffs on U.S. imports seem to have provoked a new state of normal — with nothing normal about it.

Unprecedented uncertainty for both inflation and the economy. Projections are multiplying for how interest rates could be called in the first half of 2025. Ultimately, the R-word (recession) would likely rule above all, including tariff-induced inflation (businesses are already signalling that higher prices may need to be passed onto consumers). If growth turns negative, interest rates would need to decline to help hurting households and to get things moving.

An important consideration for any attempts to forecast the path of interest rates this year? The BoC wants to assert credibility in its sole mandate — fighting inflation to ensure a healthy economic outcome. It will seek to discourage people from writing higher inflation into their futures (that could translate into asking for higher wages, which fuels inflation's persistence).

Accordingly, the BoC recently unshackled itself from an expected rate path, saying that it will focus on responding to immediate concerns rather than trying to predict how the economy will react.

Where are mortgage rates forecast to go in 2025?

If no tariffs had materialized — I expected a BoC resting rate of 2.5% by the end of 2025.

After March's cut, the BoC's policy rate still isn't low enough to encourage a consistent hum of economic growth during what would have been more 'normal' times.

Both inflation and Canada's economic engine were heating up towards the end of 2024, and a policy rate of 2.50% may have been stimulus enough to spur recovery after 2 years of high interest rates while keeping inflation in check.

That would have meant a total prime rate drop of 2.5% (from the high of 7.20% in 2024) by the end of 2025. 

(Prime rate drops directly impact variable mortgage rates.)

I think it's important to keep this forecast here for a time, offering a contrast with what is happening now at the behest of U.S. imposed trade turmoil.

If blanket or partial tariffs are indeed the new normal? Look for the BoC to cut deeper.

Whether it's the threat of U.S. tariffs, a full-blown trade war, or higher tariffs on only certain goods, the impact on our economy is already evident, with small businesses the first to suffer the most.

With an eye on potential price volatility, some economists predict the BoC might have to cut its rate another 2 to 5 times (0.25% drops) to a policy rate of at least 2.25% (and maybe as far down as 1.5%) — for a prime rate of least 4.45%, assuming the current spread with the policy rate of +2.20%.

A tariff-induced recession could see the cuts coming faster and deeper.

However, the central bank may need to consider rate pauses with inflationary headwinds blowing through its hair, especially if it needs to reassert its inflationary-fighting position to remind markets (and Canadians) of that priority.

Everything is uncertain right now. Stay with us as we seek some level of certainty about how this new reality will progress for Canadians.

Read here for more on why trade tariffs could affect mortgage rates this year, including how tariffs have worked out for everyone in the past.

What is the neutral rate?

The BoC had indicated that its neutral rate (assuming no tariffs) is pegged at around 2.75%, where the economy is neither stimulated nor repressed. However, rates might need to go lower to stimulate an economy dragged down by trade turmoil.

Is there a danger that the prime rate could increase?

There's always that danger, although the economic softening already underway makes it unlikely — unless the central bank decides to fight inflation, no matter the cause.

What about fixed mortgage rates?

Note that bond yields, which inform fixed rates, will be pushed and pulled by a mix of forces. However, if more than one interest rate cut is anticipated, look for a dedicated downward trend.

As interest rates change, fixed mortgage rates usually move in anticipation of the changes, but more fluctuation is possible between interest rate announcements. That's because fixed rates follow the bond market. Read more here.

Warm or cold? A snapshot of factors affecting rate decisions.

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

• On the burner (Inflation) – February's headline annual inflation rose to 2.6% (from 1.9% last month) following the end of the GST Holiday on Feb 15; core inflation (median and trim average) both rose to 2.9% (next reading Apr 15) 
   
  
• Cooler (Jobs) – Canada's February labour market unexpectedly cooled, creating only 1.1K jobs (compared to 76K in January) and an unchanged unemployment rate of 6.6% (next reading Apr 4)
   
  
• Warmer (Wages) – February's average wage growth rose to 3.8% (from January's 3.5%), which is the wrong direction for inflation watchers (next reading Apr 4)
  
  
• Accosted by a cold front? (Economic growth) – January 2025 GDP showed continued warming with a 0.4% growth gain (up from December's +0.3%; Q4 2024 was revised to an impressive annualized growth pace of 2.6%), but February seems to be running colder (Feb reading on Apr 30)
   
  
• Warmish (Bond yield market) – Canadian 5-year bond yields are down to 2.5% as markets reel from Trump's world trade tariffs, 25% Canadian auto tariffs, and now 25% U.S. auto tariffs

What happens if too many factors are showing heat? Then, we start looking for the BoC to pause its current rate-cut agenda.

Here's a deeper look at economic factors playing into this (tariffy-ing) rate cycle.

The G.S.T. dip is over. Canada's inflation is heating up.

Headline inflation in January rose to 2.6% (from January's 1.9%), with the GST holiday concluding on Feb. 15. Core inflation also rose to 2.7%.

These numbers, now above the BoC's 2.0% target, finally reveal the price pressures bubbling up over the last few months, including increasing consumer spending (encouraged by the GST reduction), a rate divergence with the U.S., and a lower CDN dollar.

On the horizon, however, Canadians may substantially pull back their spending dollars amid financial uncertainty due to the trade war — for a deflationary effect.

Cooler Canadian February labour market print.

The February unemployment rate was unchanged at 6.6%, and 1.1K jobs were created, much less than the 20K expected. Wage inflation also increased to 3.8% (from 3.5% last month), another factor adding to inflation creep.

According to a report from the National Bank, Canadian population growth is slowing dramatically as immigration targets are reduced, which may result in restraining the unemployment rate between 6.6% and 6.8% in 2025.

Note that this report doesn't yet log the influence of the U.S. trade war at hand.

Warmer economic faring is running into a cold front (the tariff storm).

Canadian GDP in 2024 grew by more than expected, with a revised annualized pace of 2.6% (real GDP Q4 growth was 0.6%, quarter-over-quarter). Annualized means quarterly growth compounded by a formula to assume the same pace for 4 quarters, offering a 'yearly' growth rate for comparison. Real GDP annual growth for 2024 is thought to be about 1.5% (year-over-year), higher than the BoC projection of 1.3%.

And January 2025 looks to have continued that economic warming, with a reported growth pace of 0.4%, the strongest monthly showing since April 2024.

But don't break out the barbeque yet — February numbers may run smack into a cold front instigated by Trump's tariffs and resulting economic stability. 

Trade turmoil is impacting Canadian housing markets.

National housing activity fell in February 2025, with both sales and listings falling by double digits; home prices remained relatively stable.

Will lowering interest rates (and new mortgage rules that favour younger buyers) encourage some buyers out this spring despite the trade-induced economic turmoil? Perhaps not, if financial concerns override the spring feeling of looking for a new home.

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 a 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. tariffs of 25% (or more) on Canadian imports (and Canada's expected retaliations) could devastate our economy (Canada does about 75% of its export business with the U.S.) and eventually uncomplicate the BoC's rate cut decisions with outsized need to spur the economy
• Immigration issues between the two countries may further diminish our labour productivity
• The Canadian dollar has already danced at 20-year lows against U.S. currency (partly due to trade tensions and political and economic instability)
• Interest rate divergence between the two central banks is now at 2.0%, pressuring inflation to inflate more

As you can see, it's not just blanket U.S. tariffs that can affect our economy and the BoC's rate decisions.

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.

Welcome to market volatility wrought by the opposite forces of tariff threats and inflationary pressures.

Canada's 5-year bond yields have sunk into the 2.5% range as world markets reel from Trump's tariff instigations and bond markets read it as future lower interest rates.

Bond markets will likely continue a tug-of-war between inflationary and recessionary concerns over where interest rates may be headed (which the bond market tries hard to anticipate).

Weakened consumer spending could eventually put downward pressure on prices. Canadians are already pulling back on discretionary spending (like cars and appliances), which would see rates confidently come down to support a potential recession.

The bond market will continue to fluctuate as tariffs begin to weigh on the market and as lagging indicators begin to tell the story of our economy's performance

For now, expect lender specials to pop up or disappear quickly on specific term rates, depending on yield movements. Lenders are closely monitoring their costs and retaining capital to address the potential for increasing debt arrears.

Would fixed rates drop as the prime rate drops?

Current fixed rates have largely factored in one more BoC prime rate cut.

Trade uncertainty may see them drop more (still with the potential for rollercoaster increases) as markets grapple with the repercussions of a potential recession from trade disruption.

If it seems abundantly apparent that the economy needs rate cuts regardless of rising inflation, fixed rates could decline further than initially thought (it's too soon to call a potential drop amount).

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

The U.S. economic landscape was looking pretty strong (along with rising inflation), but Trump's tariffs and mass government firings are showing up as underlying cracks.

The fresh U.S. President Trump/billionaire Elon Musk administration has thrown substantial uncertainty into how both economies will fare as 2025 is certain to become a year to remember (or forget).

Why do we care? Economic conditions south of the border can influence factors weighed by our central bank (and drive higher prices or economic detraction 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. Though trade disruption is likely to now beckon a hasty landing.

With the high-interest-rate environment so quickly imposed on Canadians to tame high inflation post-pandemic, a mild recession had been expected through the first half of 2024, which did not materialize. Until Trump took office, growth projections were starting to look up for 2025.

Will market resilience keep our economy out of recessionary territory? Some experts expect a recessionary shock from the trade war. In time, it's hoped that Canadian businesses will adapt.

Canadian initiatives are already underway in an attempt to head off an economic blow — such as reducing inter-provincial trade barriers, reviewing restrictive government regulations that choke our productivity, and unfurling more international trade opportunities.

Before the trade disruption, our labour market and economic growth were showing signs of strength, yet household budgets are still straining under the higher prices all around.

A recession would bring mortgage rates down faster.

If economic weakening accelerates, the BoC would likely drop prime rates faster (assuming that job losses would occur to help place downward pressure on inflation), providing more budget relief when we'll likely need it most.

Is stagflation a possible economic outcome?

Stagflation, an entrenched state of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. Currently, our inflation isn't high enough, having come down to around 2% from over 8%, and our unemployment rate is still within the 6's range.

The large-scale trade disruption could change that scenario if cost-push inflation (artificially higher consumer prices due to tariffs instead of high demand) soars and declining interest rates take a while to spur economic activity.

Does True North anticipate an increase in mortgage activity?

Home affordability had improved slightly in early 2025 as interest rates went lower and trade uncertainty kept a lid on demand and prices.

There was anticipation of a spring housing market rush as prime rates ease off and variable rates lower — however, if the trade war continues, many will likely hold off buying a home amid economic uncertainty.

Sellers are disappearing from housing activity as well. Those who have enough financial depth may go looking and are likely to find deals on both mortgage rates and home prices if market competition remains subdued. 

With over 1M renewals coming up in 2025, there is new hope for lowering rates to buffer potential mortgage payment increases.

Read more here about how tariffs could impact the 2025 housing market.

My mortgage advice for 2025?

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

Whether rates are falling or rising, your best rate and mortgage can help you better afford your home. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage, for a purchase, renewal or refinance.

• 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.
• Use an expert broker, preferably a highly trained, salaried, non-commissioned True North broker. You'll get expert, unbiased advice (in your preferred language) from a broker who only does mortgages. We have access to several accredited and alternative lenders and pass along a volume rate discount for your best rate.
• Hold your rate. Hold your rate with us to protect you from rate volatility while you make home or mortgage decisions.

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

Variable rates choices are trending as prime rates go lower.

Variable rates are moving 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. If you get nervous, you can always lock into a fixed rate without penalty (most lenders allow this mortgage move).

Waiting to see what rates will do? Consider locking into a shorter fixed rate — such as our low short-term fixed Rate Relief™ product. If this product is right for you, it can help you bridge the gap with budget relief now while allowing time to pass before deciding on a longer commitment.

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.