With inflation back to the Bank of Canada’s 2 per cent target and rate cuts expected to continue through next year, Canadians should anticipate lower mortgage rates and better deals going into 2025. (Getty Images) ·Witthaya Prasongsin via Getty Images
With inflation back to the Bank of Canada’s two per cent target and rate cuts expected to continue through next year, Canadians should anticipate lower mortgage rates and better deals going into 2025, experts say.
Canadians have been facing higher interest rates over the last few years, after the Bank of Canada hiked its policy rate in the wake of soaring inflation. Since June, however, the central bank has cut its benchmark rate by 175 basis points over five consecutive decisions, including two jumbo 50 basis point cuts in October and December. The Bank’s policy rate now sits at 3.25 per cent. Economists expect that the Bank of Canada will continue to reduce interest rates next year, albeit at a “more gradual” pace.
With interest rates on the way down, 2025 could see a further resurgence in interest for the variable-rate mortgage.
“We can safely expect that we’ll see some downward movement on the variable-rate side, whereas things are going to be a little bit stickier on the fixed-rate state,” Penelope Graham, mortgage rate expert at Ratehub.ca, said in an interview with Yahoo Finance Canada. Variable-rate mortgages move with the prime lending rate, which is affected by changes to the BoC’s policy rate. Fixed mortgage rates are affected by the bond market, which has seen yields remain “very, very sticky”, Graham notes. Since Oct. 1, yields for the benchmark 5-year bond have been in the range of 2.74 to 3.31 per cent.
“There hasn’t been any major movement in fixed mortgage rates in the past couple of months, and we don’t expect to see that (change) probably within the first half of next year, unless something major happens that really reassures markets,” Graham said.
“But with the way things are currently looking, there’s nothing on the radar that might suggest that.”
Victor Tran, a Toronto-based mortgage broker and Ratesdotca mortgage and real estate expert, says interest in variable rates started to pick up in the summer as the central bank began slashing its benchmark rate. With variable rates sitting slightly higher than fixed rates, he says homeowners are “starting to see that light at the end of the tunnel” and willing to deal with short-term pain of that slightly higher rate.
“A lot of customers are saying, let’s deal with a slightly higher variable rate and slightly higher payment for now. But give it another three or four months, we could be ahead,” Tran said in an interview with Yahoo Finance Canada.
Graham and Tran both expect variable-rate mortgages to fall below fixed rates in 2025. But fixed rates are still popular among mortgage holders. Tran says he still expects three-year fixed terms to remain a top choice after surging in popularity the last few years.
Going into 2025, there are still around 40 per cent of mortgages that are up for renewal. While concerns about the impact of the renewal price shock have faded in the wake of the Bank of Canada’s loosening cycle, many Canadians will be under financial pressure as they renew at higher rates.
The good news for those getting ready to renew their mortgage is that there will be competition among banks and lenders to retain and attract customers, which could lead to better deals for consumers, Tran says.
“For anyone coming up for renewal in the next year or so, you will definitely be renewing at a higher rate with a higher payment,” he noted.
“There is a bit of a relief now since rates have been coming down. And because of the elimination of the stress test rate (for those that are renewing), it definitely gives more options for Canadians to shop around a bit more and have more bargaining power… I think it’s still going to be pretty competitive going forward in 2025, and we may see some crazy offers.”
“With new business floating around, and because it’s a little bit easier for people to switch to a new lender at renewal, we are expecting that banks will be as competitive as they possibly can be with their rates,” Graham noted.
“We do think that we’ll see some of the mortgage rate-war pricing that we’ve seen in years past, where somebody might come out with a fantastic-looking promo and then you may see smaller lenders chipping away at that basis point-by-basis point to get that edge.”
But there is a big caveat when it comes to 2025 expectations, Graham warns. That’s economic uncertainty going into next year, particularly when it comes to incoming president Donald Trump’s threat to levy tariffs on Canadian imports into the United States, and the impact that may have on the Canadian economy.
“Right now, the big question mark for every economist is are these tariffs actually going to come to fruition? If they do, we’re looking at a very different scenario,” Graham said.
“All of a sudden, we could be looking at a potential trade war, we could see inflation soar again, and that very well likely could put the Bank of Canada in (a different) position… It’s certainly top of mind for anybody who is trying to do forward-looking analysis right now.”
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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