Posted On Feb 20, 2025

If you’ve been keeping an eye on mortgage rates in Canada, you’ve probably noticed some movement—both in variable and fixed rates. But what exactly drives these rates, and where do they look like they are they headed (and why?) in 2025 and beyond? Let’s break it down in simple terms and explore what recent economic trends mean for homebuyers and homeowners.

 

What Moves Mortgage Rates?

Variable Mortgage Rates: The Bank of Canada’s Influence

Variable mortgage rates in Canada are tied to the prime rate, which is influenced by the Bank of Canada’s (BoC) overnight rate (which is the rate the Banks borrow at). When the BoC raises or lowers its rate, banks and lenders usually adjust their prime rates accordingly—directly impacting what you pay on your variable-rate mortgage.

The BoC makes these decisions based on factors like:

  • Inflation: Higher inflation often leads to rate hikes

  • Economic Growth: If the economy slows down, the BoC may lower rates to stimulate spending

  • Employment Levels: A strong job market supports higher rates, while job losses may push rates lower

Fixed Mortgage Rates: Bond Yields Matter

Fixed mortgage rates, on the other hand, are influenced by government bond yields. Lenders use these yields as a benchmark to price fixed-rate mortgages.

  • When bond yields rise, fixed mortgage rates go up (often due to inflation concerns or a booming economy)

  • When bond yields fall, fixed rates tend to drop (typically during economic uncertainty when investors flock to bonds for safety)

 

 

The Economic Landscape: What’s Happening Now?

Over the past year, Canada’s economy has faced some unique challenges that are shaping mortgage rate trends. Here’s a quick snapshot:

  • Inflation: While inflation cooled in 2024, it ticked back up in early 2025, hitting 1.9% in January due to higher gas and energy costs

  • Employment: The job market remains stable, but businesses are cautious about hiring due to economic uncertainty

  • Canadian Dollar: The CAD has been losing ground against the USD, making imports more expensive and fueling inflation

  • Equity Markets: Investors have been shifting money from stocks to bonds due to concerns about a slowing economy, pushing bond yields lower (which is good news for fixed mortgage rates)

Another major factor? Trade tensions. The U.S. has threatened tariffs on certain Canadian goods, and Canada is considering counter-tariffs. This could lead to higher costs for businesses and consumers, increasing inflation but slowing economic growth—a tricky situation known as stagflation (a mix of high inflation and a sluggish economy). Additionally, tariffs and counter-tariffs can reduce trade volumes, disrupt supply chains, and dampen consumer confidence. As businesses face higher costs for imported goods and materials, they may pass those costs onto consumers, pushing inflation higher. At the same time, reduced trade can lead to lower production and job losses, ultimately weakening overall economic performance in both Canada and the U.S.

 

What’s Next for Mortgage Rates?

With these economic forces at play, what can we expect for mortgage rates in the coming months and into 2026? The ongoing trade tensions between Canada and the U.S., including potential tariffs and counter-tariffs, are adding additional pressure on the economy. As economic uncertainty grows, the Bank of Canada may likely continue cutting rates to stimulate economic growth, making further reductions in the prime rate and variable mortgage rates increasingly probable.

At the same time, investors are pulling money out of equity markets due to concerns over a potential economic slowdown in both countries. This shift towards fixed-income securities, such as bonds, is driving bond yields lower, which in turn should lead to a decline in fixed mortgage rates as lenders adjust their pricing. This means that both variable and fixed mortgage rates are likely to decrease in the coming months as economic uncertainty continues to influence market behavior.

Variable Rates Outlook

The Bank of Canada has already cut rates six times since mid-2024, bringing its policy rate down to 3% in January 2025. More cuts are expected throughout 2025 as the government prioritizes economic growth over controlling inflation.

What this means for you: If you have a variable mortgage or are considering one, your interest rate is likely to keep dropping, reducing your monthly payments over time.

Fixed Rates Outlook

With economic uncertainty pushing bond yields lower, fixed mortgage rates are also expected to decline. This means borrowers looking for the security of a fixed rate might find some attractive deals in the near future.

What this means for you: If you’re thinking about locking in a fixed rate, you might see some better offers in the coming months as lenders adjust to lower bond yields.

  

What Should Homebuyers and Homeowners Do?

So, should you go with a fixed or variable mortgage? Here’s the bottom line:

  • If you like stability and don’t want to worry about rate fluctuations, a fixed-rate mortgage might be the way to go—especially as rates continue to trend lower.

  • If you don’t mind some risk and want to take advantage of potential rate cuts, a variable-rate mortgage could save you money as the BoC continues to ease policy.

Either way, staying informed and working with a mortgage professional can help you make the best decision for your financial situation.

 

Final Thoughts

The Canadian mortgage landscape is shifting, with both variable and fixed rates likely heading downward in 2025. However, the broader economy—trade tensions, inflation, and economic growth—will play a big role in shaping the future.

As always, if you’re planning to buy a home, refinance, or renew your mortgage, keeping an eye on economic trends will help you make a smarter financial move.

Thinking about a mortgage? Now might be a great time to explore your options!

 

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