Will Mortgage Rates Go Down in 2025 in Canada? The Expert’s Take

Predicting the future of mortgage rates in Canada is a high-stakes guessing game, even for seasoned economists. While there’s no crystal ball, the most likely answer for 2025 is: potentially, yes, but not dramatically and with significant caveats. The downward pressure depends heavily on the Bank of Canada’s inflation management and the overall global economic landscape.

Decoding the Crystal Ball: Factors Influencing Mortgage Rates

Pinpointing the trajectory of mortgage rates requires a nuanced understanding of several interconnected factors. It’s not just about gut feeling; it’s about dissecting data and understanding the underlying forces at play.

The Bank of Canada’s Balancing Act

The Bank of Canada (BoC) is the central conductor of Canada’s monetary policy orchestra. Its primary tool for managing the economy is the overnight rate, which directly impacts the prime rate used by banks to set their variable mortgage rates. If the BoC believes inflation is under control and economic growth is sluggish, it’s likely to lower the overnight rate. Conversely, if inflation remains stubborn, the BoC will likely maintain or even increase the overnight rate. Therefore, future BoC announcements and monetary policy reports are crucial indicators.

Inflation: The Unseen Puppet Master

Inflation remains the dominant force influencing the BoC’s decisions. If inflation rates steadily decline towards the BoC’s target of 2%, the pressure to maintain high interest rates will ease. However, external factors like geopolitical instability, supply chain disruptions, and energy price volatility can all reignite inflationary pressures, throwing a wrench in any plans for rate cuts.

The Global Economic Stage

Canada doesn’t exist in a vacuum. The global economy, particularly the performance of the US economy, significantly impacts Canada. A strong US economy can boost Canadian exports and economic growth, potentially leading to higher inflation and interest rates. Conversely, a US recession could drag down the Canadian economy, prompting the BoC to lower rates to stimulate growth. Keep a close watch on US Federal Reserve policy and international economic forecasts.

Bond Yields: The Fixed-Rate Harbinger

Fixed mortgage rates are primarily influenced by government bond yields. These yields reflect investor expectations about future inflation and economic growth. If investors anticipate lower inflation and slower growth, bond yields will typically decline, leading to lower fixed mortgage rates. Tracking the Government of Canada bond yields is essential for gauging the direction of fixed rates.

Housing Market Dynamics

The Canadian housing market itself plays a role. If the market cools down significantly, with declining home prices and sales, the BoC may be more inclined to lower interest rates to stimulate activity. However, a persistently strong housing market, fueled by immigration and limited supply, could keep rates higher for longer.

Scenario Planning: Potential Rate Trajectories

Based on these factors, here are a few potential scenarios for mortgage rates in 2025:

• Optimistic Scenario (Likelihood: 30%): Inflation falls consistently below 3% by late 2024 and early 2025. The global economy stabilizes. The BoC begins gradually cutting the overnight rate, leading to lower variable and fixed mortgage rates. Expect a drop of 0.5% to 1% in both variable and fixed rates by the end of 2025.
• Neutral Scenario (Likelihood: 50%): Inflation remains sticky, hovering around 3%. The global economy experiences moderate growth. The BoC holds the overnight rate steady for most of 2025, with perhaps a small cut towards the end of the year. Mortgage rates remain relatively stable, with only minor fluctuations.
• Pessimistic Scenario (Likelihood: 20%): Inflation re-accelerates due to unforeseen events (e.g., a major geopolitical conflict). The global economy enters a recession. The BoC is forced to increase the overnight rate further to combat inflation. Mortgage rates rise again, potentially exceeding current levels.

What Should Homebuyers and Owners Do?

Given the uncertainty, flexibility and prudence are key.

• Stress Test Considerations: Always remember the mortgage stress test. Even if rates decline, ensure you can still afford your mortgage at a rate 2% higher than your contracted rate.
• Variable vs. Fixed Rate: This is a personal decision based on risk tolerance. If you believe rates will decline, a variable rate might be advantageous. If you prefer certainty, a fixed rate offers stability. Consider a hybrid mortgage for a blend of both.
• Shop Around: Don’t settle for the first offer. Get quotes from multiple lenders, including banks, credit unions, and mortgage brokers.
• Consult a Professional: A qualified mortgage broker can provide personalized advice based on your financial situation and risk tolerance.

Frequently Asked Questions (FAQs)

1. What is the current average mortgage rate in Canada?

As of late 2024, the average 5-year fixed mortgage rate is hovering around 5.5% to 6.5%, while variable rates are generally around the prime rate (currently 7.2%) minus a discount, putting them in a similar range. These figures are subject to change and vary depending on the lender, your credit score, and the size of your down payment.

2. How do fixed and variable mortgage rates differ?

Fixed mortgage rates remain constant for the duration of the term, providing predictable monthly payments. Variable mortgage rates fluctuate with the Bank of Canada’s overnight rate, meaning your payments can increase or decrease.

3. What is the impact of the stress test on my mortgage affordability?

The mortgage stress test requires borrowers to qualify at a rate 2% higher than their actual contracted rate. This ensures they can afford their mortgage payments even if rates rise in the future. It significantly impacts the amount you can borrow.

4. Is it a good time to buy a home in Canada right now?

That depends on your individual circumstances. Factors to consider include your financial situation, your long-term housing needs, and your tolerance for risk. A cooling housing market in some regions may present opportunities, but rising interest rates can impact affordability.

5. How can I improve my chances of getting a lower mortgage rate?

Improve your credit score, save for a larger down payment, and reduce your debt-to-income ratio. Also, shop around for the best rates and consider using a mortgage broker.

6. What are some alternative mortgage options to consider?

Consider hybrid mortgages (combining fixed and variable rates), portable mortgages (allowing you to transfer your existing mortgage to a new property), and reverse mortgages (for homeowners aged 55 and over).

7. How does the Canadian dollar’s value affect mortgage rates?

A weaker Canadian dollar can lead to higher inflation, potentially prompting the Bank of Canada to raise interest rates to protect the currency’s value.

8. What role do government regulations play in mortgage rates?

Government regulations, such as the mortgage stress test and restrictions on insured mortgages, can influence the demand for housing and, consequently, the direction of mortgage rates.

9. How often does the Bank of Canada announce its overnight rate?

The Bank of Canada typically announces its overnight rate eight times a year, according to a pre-set schedule. These announcements are closely watched by financial markets and consumers.

10. What are the risks of taking out a variable-rate mortgage?

The primary risk is that interest rates could rise, leading to higher monthly payments and potentially making it difficult to afford your mortgage.

11. How can I hedge against rising mortgage rates?

Consider locking in a fixed rate, making accelerated mortgage payments, or building a financial buffer to cover potential payment increases.

12. Where can I find reliable information about mortgage rates and economic forecasts?

Consult the Bank of Canada’s website, reputable financial news outlets (e.g., The Globe and Mail, Financial Post), and independent economic research firms. Always verify information from multiple sources.