Mortgage Rate Forecast Canada 2024 – 2025
The next Bank of Canada interest rate announcement is on:
December 11, 2024
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The decisions Canadians make on their mortgage in 2024 largely depend on the mortgage rate forecast. It’s a decision that will affect homeowners for several years to come and could lead to thousands of dollars in mortgage interest savings.
Here, we will look at where mortgage rates are likely headed, based on a current, November 2024 review of economics, years of in-depth mortgage market study, and working with thousands of mortgage files.
These 4 main predictions will be reviewed (fully updated for November 2024):
- Historical context: Mortgage rates will likely gravitate lower over the long term, to a historical trend in the high 3% range.
- The market consensus on the mortgage interest rate forecast in Canada is split 50/50 for the Central Bank to cut rates by either 0.25% or 0.50% at their December 2024 meeting.
- Signs of economic slowdown, with fixed mortgage rates fluctuating slightly through the remainder of 2024, and an additional 1.25% of Bank of Canada cuts.
- How to position yourself for the best mortgage rates in this rate cycle and save the most on your mortgage.
Historical context: Mortgage rates in Canada are forecasted to gravitate towards historical lows for the long term of 5 – 10 years.
To help determine mortgage rate forecast, one of the best perspectives we have available is a historical one.
During the great recession of 2008, the financial system and economy as a whole required bailouts and stimulus as never before seen, just to keep running. Thankfully, the stimulus did its job, and the economy rebounded and got back on track. However, between 2008 – 2019, for over 10 years, there was very low or stagnant GDP growth, and interest rates remained low accordingly.
During the covid pandemic, in 2020 – 2022, we witnessed a similar massive economic bailout. This time the stimulus was far greater, with over 40% of dollars ever created between 2020 – 2022.
However, in part due to a literal shutdown of the economy and of supply chains at one point and difficulty rebooting these supply chains, combined with excess consumer demand from pandemic savings, there was much more inflation as the economy stabilized.
This inflationary difference will be discussed in more detail below. However, the main point here is that historically, when a massive new government and private debt are layered upon already massive debt, this can perpetuate dependence on yet ever cheaper debt to stimulate the economy long term. It can lead to long term economic stagnation and, importantly, to a ‘magnified effect’ of increased rates.
More specifically, with 5 times more debt in the economy today, adjusted to inflation, than in the 1980s and early 90s, a single 0.25% rate increase makes an approximately 5 times bigger impact than it did when debt levels were a fraction of current levels. Accordingly, there is significant long term pressure for rates to remain low.
From another historical perspective, when rates increased in the 1980s from a base point of 10% to a 20% high point, this represented a 2x rate increase. However, a rate increase in 2022 – 2023 from a base point 0.25% to 5% represents a 20x rate increase, which has had a much greater shock to the economy.
Finally, the ‘neutral rate‘ or ‘target rate’ at the Central Bank of Canada, which is the rate seen as neither repressing nor stimulating the economy, is currently 2.5% – 3%. Given this, as of November 2024, we expect 1.25% further Central Bank rate cuts (3.75% current down to 2.5%), and this, too, infers fixed and variable rates to stabilize in the mid-high 3% range.
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As of November 12, the market consensus on the mortgage rate forecast in Canada is split for the Central Bank to cut the prime rate either by 0.25% or 0.50% at its December 11, 2024 meeting.
The main tool we have when reading the current mortgage rate market is the Government of Canada Bond Yield. The Canadian bond is a government debt security that pays a return to an investor. The ‘%’ based return is called the ‘yield’ and is considered one of the safest investments because the Government would have to go bankrupt for it not to pay its investors.
The Government of Canada 5 year Bond Yield factors in all known economic data on a day to day, and even a minute to minute basis. Simply put – when the market/ bond traders think that the Central Bank of Canada will increase rates, the Bond Yield increases. When the Bond market thinks the Central Bank rate will decrease, then the yield drops. In other words, the Bond yield trades or is priced in anticipation of where the Central Bank of Canada rates will move. The Central Bank of Canada makes its rate decisions based on how it sees the economy performing.
Currently, as of November 12 2024, as seen in the Yield chart below, the Canadian Bonds are pricing in a 52% chance for a 0.25% Bank of Canada rate cut and a 48% chance of a 0.50% cut in December 2024, and an additional 0.75% – 1% of cuts in 2025.
Given the following economic data, it appears that the economy is cooling enough to hold inflation lower, and justify rate cuts:
- Low GDP/ economic growth (with negative Real per capital growth)
- A generally weakening labour/jobs market
- Substantial downward trend of CPI/ inflation hitting 1.64% in September
As we will review more closely in the next section, the economy is on track to justify rate cuts in December 2024 and into 2025.
*1 Month Bond Yield View*
*6 Month Bond Yield View*
Economic slowdown, lower inflation and lower Bond Yields. What does this mean for mortgage interest rates?
With lower spending comes a slowing economy, lower inflation, and lower mortgage interest rates.
Current high rates will lead to lower rates – by design.
Here we take a closer look at how the economy is slowing, and how this will affect mortgage interest rates in 2024 and 2025 more specifically.
As of November 2024, the Canadian economy is on the brink of recession, with only population growth and government stimulus keeping Canada out of a technical recession at this point.
However, if we look at Real GDP per capita, or Canadas economy divided by the population size and removing the effects of inflation (inflation is not real economic growth), Canada is well into a recession.
More specifically, given this Real GDP per capita measure, there has been over a year and a half of economic decline – Canada has seen no Real GDP growth since March 2014. In other words, that’s over 10 years of economic growth erased.
It is known in economics, and as recently mentioned by the Central Bank of Canada, that it takes 12-24 months for a single interest rate hike to ‘trickle through’ or have a full effect on slowing an economy. While the first small 0.25% interest rate hike in Canada happened in March 2022, as of August 2024, we just now witnessing the full effects of the rate hikes of 2022-2023.
As 2024 comes to an end, even with decreasing rates, we will still likely see the restrictive effects of 2022 and 2023 rate increases build momentum. For example, as 2% range fixed mortgages renew into 4% range fixed mortgage rates, this continues to pull discretionary spending out of the economy.
So it is important to keep in perspective that:
(1) The previous rate hikes we have seen have not had their full effect on slowing the economy, and we are already seeing a recession.
(2) It is a matter of how long Canada can withstand such high rates before more significant negative economic impact.
Accordingly, the question is now focused on how long these high rates will remain.
As of November 2024, given this exceedingly weak ‘beneath the surface’ economic performance in Canada, the financial markets think there’s room for 1.25% of additional rate cuts over the next 12 months.
Financial Markets and the Central Bank of Canada more aligned in their thinking
The Bank of Canada stated in its October 2024 meeting that it believes there is more room to cut rates, as long as inflation remains in the 2% range or lower. This is in line with what the financial markets are currently projecting for cuts in December 2024, and into 2025.
So, what does this mean for 2024-2025 mortgage rate predictions?
What goes up to slow the economy will eventually come down to stimulate the economy.
The Central Bank of Canada (and the Federal Reserve in the USA) is determined to fight inflation, which is why they were seen as slamming the breaks on the economy as a whole. There is no doubt this, unfortunately, has been painful for many. However, low inflation is needed on a foundational level to enjoy another long-term run of lower interest rates.
However as we move towards the end 2024, Central Banks around the globe have begun cutting rates to start supporting economic growth again – or at least, slow the pace of decline. This means a trend for lower mortgage interest rates.
While the variable rate mortgage is directly affected by the Central Bank decisions, we will likely see fixed rates as determined by bond yields, fluctuate upwards by 0.10% – 0.20%, before dropping again as we move into 2025.
The reason for a potential near term increase in fixed mortgage rates is the influence of stronger US financial markets on Canadian financial markets, particularly Canadian Bond Yields. Because bond yields determine fixed mortgage rates in Canada, the US financial markets can indirectly influence Canadas fixed mortgage rates higher. This is likely to be short lived however as the Bank of Canada drops rates and if inflation in Canada remains close to 2%.
In December 2024 or January 2025 we are likely to see fixed mortgage rates drop again.
Medium term, mortgage rates will not normalize at the lowest levels seen during covid. However, as fixed mortgage rates are currently hovering around the mid – high 4% range, the expectation is that mortgage rate normalization may occur in the high 3% range. This reflects the current mid point ‘neutral rate’ range as set by the Bank of Canada as discussed in the first part of this article.
But what does ‘getting to the high 3% rate range’ look like?
As of November 12, the Bank of Canada prime rate/ overnight lending rate is 3.75% and financial markets are forecasting:
| Date | Current Bank of Canada Rate Forecast |
|---|---|
| December 2024 | 3.50% |
| January 2024 | 3.25% |
| March 2025 | 3% |
| June 2025 | 2.75% |
| September 2025 | 2.50% |
| October 2025 | 2.50% |
Fixed and Variable Mortgage Rate Forecast in 2024 and 2025
| Date | 5 YR Fixed Mortgage Rate Forecast | Variable Mortgage Rate Forecast (Prime – 1%) |
|---|---|---|
| December 2024 | 4% – 4.50% | 4.70% |
| January 2025 | 3.75% – 4% | 4.45% |
| March 2025 | 3.75% – 4% | 4.2% |
| June 2025 | 3.75% – 4.25% | 3.95% |
| September 2025 | 4% – 4.50% | 3.7% |
| October 2025 | 4% – 4.50% | 3.7% |
This represents a further 1.25% drop of the variable mortgage rate projected into September 2025 to hit the mid point of the Bank of Canadas neutral or target rate range.
There will likely be changes to this…
As of today, this is how billions of dollars in the financial markets are pricing bond yields and in turn, fixed mortgage rates. In other words, this rate cutting cycle is what the lower fixed rate of today are relying on.
However unexpected events will likely happen and the economy could fall faster than anticipated, requiring more aggressive cuts.
On the other hand if inflation picks back up and these Central Bank rate cuts do not proceed along this rate cutting trajectory, then bond yields would rise and will take fixed mortgage rates higher as well.
This brings us to our discussion on how to position yourself for the best mortgage rate in this environment.
How to position yourself for the best mortgage rates in this rate cycle and save the most on your mortgage
Given an understanding of mortgage interest rate predictions, opportunities and risks, a calculated approach may be considered to position yourself to reduce risk and take advantage of lower mortgage rates.
A Variable Mortgage Interest Rate Strategy
With all the Bank of Canada rate cuts happening, the variable mortgage interest rate is getting more attention.
As Central Bank of Canada cuts continue in 2024, the variable rate holder will benefit immediately with each cut.
Given over 40 years of historical rate data, as seen in a York University study on Canadian interest rates, the variable rate has been shown to save Canadian homeowners more than fixed mortgage rates, about 80% of the time. So as rates drop there is a good chance we are heading into an economic cycle where these historical variable rate savings will happen.
With the typical variable rate projected to find footing in the high 3% range within 1 year, there is potential for more savings with the variable rate compared to todays fixed rates which are typically in the mid 4% range.
There is a good chance the Canadian economy falls faster than expected, especially if the US economy weakens. There are also geo-political tensions and other potential global ‘events’ that could result in lower rates sooner. Indeed, every 10 years or so there seems to be an event that causes interest rates to plummet. While we can not count on these negative events, the variable rate can serve as a hedge against the negative event if it does happen.
On the other hand, if for example, after 3-4 more Bank of Canada interest rate cuts inflation makes a comeback, then the cuts could be paused, leaving the variable mortgage holder stuck in the mid 4% range. So here in lies the main risk with variable rates currently.
To help protect from interest risk, as the Bank of Canada cuts rates, the variable rate holder could leave the mortgage payment constant/static, thereby increasing the principal pre-payments (given less interest component of each payment). This would result in a faster/ shorter amortization, substantial interest savings and an insulation against rate risk. Depending on preference, the payment could be held right away, starting at the next rate cut. Or once the variable rate reaches a lower threshold, for example 5%, the payment could be held constant at this point, with proceeding cuts resulting in higher principal mortgage payments.
But the main approach Canadians take to protect against the uncertainty of the variable rate, is the fixed mortgage rate.
A Fixed Mortgage Rate Strategy to Lower Your Rate and Reduce Interest Rate Risk
As of November 2024, 5 year fixed rates in the low-mid 4% range are approximately 0.75% lower than variable rates in the low 5% range. So by locking into a 5 year fixed rate now, rate savings is highly likely for the next 4 months.
Whereas another 0.25% – 0.50% of rate cuts are likely in 2024, as we move into 2025 there is some risk that the cuts don’t proceed by the additional 1% as currently projected. Or perhaps the cuts do play out as projected, brining the typical variable into the 3.5% – 3.75% range, but then increase in 2026 – 2027 if inflation picks up with a strengthening economy.
So while a 5 year fixed rate may or may not lead to greater interest rate savings vs the variable rate, it is well positioned in the high 3% – low 4% range already taking advantage of and pricing in approximately 1.25% of Bank of Canada cuts today and for the next 5 years, no matter what ends up happening with inflation during this time.
It can add peace of mind that your payment won’t increase if rate cuts don’t go as planned. This peace of mind can be priceless for many.
Advantages and disadvantages of a 3 Year Fixed Mortgage Rate
The 3 year fixed mortgage rate continues to be the most popular mortgage rate in Canada. The main value proposition behind the 3 year fixed rate is that the rate is not too much higher than the 5 year fixed rate (typically 0.10 – 0.20 higher), however if rates are lower in 3 years the mortgage can be renewed into the lower rate at that time, resulting in savings vs todays fixed mortgage rates.
There is some risk with this strategy however, as it is possible in 3 years time, rates are higher. If government policy or a lower Canadian Dollar causes inflation to increase above 3% per year, we could very well see interest rates rebound back into the mid to high 4% range – perhaps higher. So this is a real possibility of renewing into a higher rate, not a lower rate after 3 years.
For this reason, those who are more conservative or have a lower risk tolerance are advised to consider a 5 year fixed rate, especially if the rate is lower.
For those that are OK with a bit more risk that after 3 years rates could be higher, because they want to be more flexible incase of lower rates, then the 3 year fixed mortgage rate can be a good decision.
What about a 1 or 2 year fixed rate?
Whereas in 2022, 2023 and in early 2024, 1 or 2 year fixed rates were priced as high as 6%, this is not the case anymore. Over that period the recommendation leaned heavily towards 1-3 year fixed rates, with many opting for the shorter term rates. But the economics of mortgage rates have changed, and less value is seen in 1-2 year fixed rates.
More specifically, 1-2 year fixed are typically priced 0.50% – 0.75% higher than 5 year fixed rates. The main reason a borrower would pay more for these shorter term fixed rates, is to renew at a time when rates are lower. However if the Bank of Canada does not cut rates as deeply as currently projected by financial markets/ bond markets, then there will not likely be any savings with these shorter term fixed rates.
On the other hand, if the Bank of Canada cuts by the current projection or more, then you’d be better off with a variable rate in the high 3% range – realizing those savings much sooner. In other words, if you’re counting on lower rates in 1-2 years, you’re also counting on variable rates dropping to less than 4% and holding. So its likely that locking into a higher 1-2 year fixed rate will cost you in the short term vs. a variable rate.
For those looking for the lowest rate and more protection over the next few years, the 3-5 year fixed rate in the low-mid 4% range likely offers more value.
Connect with Altrua Financial for more details, calculations and to see what strategy may be right for you, or check out our other articles on the subject just below:
Major Bank Prime Interest Rates Canada
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Central Bank of Canada Prime Rate
