Canada Mortgage Rates Forecast: Trends and Insights

Canada's mortgage rates have been on a rollercoaster ride in recent years, and it's essential to stay informed about the trends and insights that can help you make smart financial decisions.

According to our forecast, the Bank of Canada's benchmark interest rate is expected to remain low, hovering around 1.5% to 2% in the next quarter. This is a welcome relief for homebuyers and existing homeowners alike.

The 5-year fixed mortgage rate is likely to stay steady, with some lenders offering rates as low as 2.5%. This is great news for those looking to fix their mortgage rates for the next 5 years.

The 5-year fixed mortgage rate is expected to stay steady, with some lenders offering rates as low as 2.5%. This stability can provide peace of mind for homebuyers and existing homeowners.

Consider reading: 5 Year Interest Only Mortgage Rates

Canada's economy is grappling with structural challenges, including record immigration and heavy reliance on public sector growth. This is why economists predict further rate cuts, potentially bringing the overnight rate to 2.5% by mid-2025.

The Bank of Canada maintains a benchmark interest rate known as the overnight rate or the policy interest rate. This rate serves as one of the main drivers of rising rates in the Canadian economy.

The Bank of Canada has committed to holding the current low overnight rate of 0.25% until at least 2022. The Bank of Canada has justified their choice by stating that “recovery continues to require extraordinary monetary policy support.”

Currently, mortgage rates are considered low and are gradually increasing as the economy recovers from the effects of the COVID-19 pandemic.

Understanding mortgage rates can be a complex topic, but it's essential to grasp the basics to make informed decisions. The Bank of Canada's overnight rate has a significant impact on mortgage rates, especially for variable mortgages.

The overnight rate, currently set at 0.25%, is a benchmark interest rate that influences the rates banks charge each other. This rate gets passed on to borrowers, making it a crucial factor in determining mortgage rates.

Here are the main types of mortgage rates you should be aware of:

Keep in mind that fixed-rate mortgages are more influenced by government bond yields, while variable mortgages are heavily affected by the overnight rate.

Take a look at this: Does Canada Have Fixed Rate Mortgages

A fixed mortgage rate is a set interest rate that remains constant throughout the term of the mortgage loan.

This means your monthly mortgage payments will stay the same, providing stability and predictability over time.

With a fixed rate, you're essentially locking in your rate to shield yourself from fluctuations in the market.

This gives you peace of mind knowing exactly what you'll owe each month.

The prime rate is a benchmark interest rate set by banks, based on the central bank's policy rate and other factors like market conditions and their own cost of funds. Banks use the prime rate to determine interest rates on various loans and financial products.

The prime rate has a significant impact on your mortgage rate, as it's often tied to the prime rate. The Bank of Canada's policy rate, also known as the overnight rate, influences the prime rate, which in turn affects your mortgage payments.

Additional reading: How Does Prime Rate Affect Mortgage Rates

Banks set their prime rates to ensure they're not losing money by lending to you. If the prime rate is low, banks may be more willing to lend, but if it's high, they may be more cautious.

The prime rate is a key factor in determining variable mortgage rates, which can change over time based on the prime rate. This means your monthly payments could increase if the prime rate rises.

In Canada, the Bank of Canada has committed to holding the current low overnight rate of 0.25% until at least 2022, which should help keep prime rates low for now.

On a similar theme: Super Prime Mortgage Rates

A 5-year fixed mortgage can offer you stability and peace of mind, but it's essential to weigh the pros and cons before making a decision.

One of the main advantages of a 5-year fixed mortgage is risk protection - your rate is locked in, and you can budget with greater accuracy. This is especially important for risk-averse buyers.

On a similar theme: Bank 5 Mortgage Rates

The 5-year term is historically the most popular option, and lenders often encourage you to opt for it. This is because it's a competitive rate term, and lenders often get the most aggressive when pricing these terms.

However, there are also some downsides to consider. One of the cons of a 5-year fixed mortgage is that you'll likely pay a higher rate compared to a variable mortgage. In fact, according to a landmark 2001 study by York University Professor Moshe Milevsky, historically, over 90% of Canadians who have maintained a variable mortgage rate have paid less in interest.

If you do need to break your mortgage, be prepared for a potentially hefty break penalty. With a fixed mortgage rate, your penalty will be the greater of the interest rate differential (IRD) or three months' interest.

Check this out: Shop Mortgage Rates

In 2024, a staggering 69% of all mortgages contracted were fixed-rate mortgages, according to the 2024 CMHC Mortgage Consumer Survey.

Discover more: Assumable Mortgages Can Help Buyers Get Sub-4 Mortgage Rates

Most mortgages have a fixed rate over a 5-year term, which is a great option for those who want predictability in their monthly payments.

Mortgage rates for a 5-year term are directly influenced by 5-year government bond yields.

Here's a breakdown of the key facts:

Canada's interest rates are influenced by a combination of economic signals, including inflation and GDP growth. Inflation can have a significant impact, as seen in October when it climbed to 2%, up from 1.6% in September.

The Bank of Canada takes GDP growth into account, as a slowdown in Q3 GDP growth to 1% fell short of the 1.5% forecast. This highlights weaknesses in private sector growth, which can affect interest rates.

The jobs report can also tip the scale, as seen in November when Canada added 50,000 jobs, but unemployment climbed to 6.8%. This can influence interest rates by affecting the overall health of the economy.

Here are some key indicators that can influence interest rates:

These indicators can shift market expectations and push bond yields lower, as seen when investors expect a larger rate cut to stimulate the economy.

Inflation climbed to 2% in October, up from 1.6% in September, initially predicting a modest 25 basis point cut.

GDP growth fell short of forecasts, growing at only 1% in Q3, highlighting weaknesses in private sector growth.

The November labour report revealed Canada added 50,000 jobs, but unemployment climbed to 6.8%, and population growth outpaced job creation.

These indicators pushed bond yields lower and shifted market expectations to a 50 basis point cut to stimulate the economy.

Here are the key indicators that influenced interest rates:

Bond yields are closely tied to the policy interest rate, which is set by the Bank of Canada. This connection is a key factor in influencing mortgage rates.

The 3-year bond yield is a good indicator of what's to come in terms of interest rates. If investors expect the Bank of Canada to raise rates, bond yields typically increase.

A surge in bond yields can lead to higher fixed mortgage rates. This is because big banks and smaller lenders often follow the trend set by bond yields.

Related reading: Why Are Mortgage Rates Pegged to Rate Set by Fed

So far in 2024, 69% of all mortgages contracted were fixed-rate mortgages. This suggests that many Canadians are choosing to lock in their rates to protect against potential increases.

The 5-year government bond yield drives 5-year mortgage rates, making it a crucial factor in determining these rates. It's worth noting that 5-year mortgage rates are fixed over a 5-year term.

Here's a quick comparison of the 5-year fixed mortgage rates:

As bond yields continue to rise, it's likely that fixed mortgage rates will follow suit. This is already happening, with the five-year bond yield surging to 1.4%.

A different take: Mortgage Bond Rates Today

The Federal Reserve's actions can sometimes seem counterintuitive, like a couple of weeks ago when they cut short-term interest rates by half a percentage point, but then mortgage rates rose significantly in October.

This unusual move can be attributed to the fact that the Fed justified its rate reduction by citing slowing job gains and falling inflation, but two economic reports later contradicted their analysis.

Inflation actually ticked up to 2.7% in August from 2.6% in July, which is a bit of a surprise given the Fed's expectations.

Healthy job creation can fuel inflation, and mortgage rates are highly sensitive to inflationary pressures. So, it's not surprising that the news of robust job growth in September, with 254,000 new nonfarm payroll jobs, was followed by a month of rising mortgage rates.

The Fed is expected to cut short-term interest rates again, but it remains to be seen how the market will react to this move, especially in the aftermath of the election.

Curious to learn more? Check out: Inflation Report Mortgage Rates

Historical 5-year fixed mortgage rates are a great way to understand which mortgage terms attract lower rates.

Looking at the lowest 5-year fixed rates of the year in Canada for the last several years, we can see a pattern. The lowest rates have typically been seen in the past 20 years, with a notable dip in the 2020 pandemic.

You might like: Mortgage Rates under 5 Percent

According to the Ratehub Historical Rate Chart, here are the lowest 5-year fixed rates of the year in Canada for the last several years:

Mortgage rates tend to follow the state of the economy. In a healthy economy, rates rise as more people are looking to borrow.

The housing market in Canada is showing signs of levelling out, with real estate boards reporting slower price increases and a potential correction in housing prices in the next year or so. This is a welcome relief for many homebuyers and sellers who were caught off guard by the rapid price hikes since 2020.

Real estate experts are optimistic about the opportunities presented by falling interest rates, particularly for multiplex investments and value-add projects. Lower interest rates can improve cash flows and make renovation and conversion projects more feasible and profitable.

In Toronto, the real estate market is particularly promising, with higher rents and completion values offering strong potential for returns compared to other regions.

Toronto's real estate market is heavily influenced by interest rates. Falling rates present opportunities for multiplex investments and value-add projects.

Lower interest rates enhance cash flow for multiplex investments. This is because lower rates reduce borrowing costs, making it easier to manage cash flow.

Rate cuts also make renovation and conversion projects more feasible and profitable. Toronto's higher rents and completion values amplify the potential for returns compared to other regions.

The overnight rate, set by the Bank of Canada, has a significant impact on interest rates in Canada. This rate influences the economy and is used to target an inflation rate of 2%.

The overnight rate affects variable mortgages more than fixed-rate mortgages. This is because variable mortgages are directly tied to the overnight rate.

The Bank of Canada has committed to holding the current low overnight rate of 0.25% until at least 2022.

Explore further: Mortgage Brokers Are Predicting a Return to Lower Mortgage Rates.

In the real estate market, prices and sales are levelling out after a period of rapid growth. This is according to real estate boards across the country, which have reported a slowing rate of increases since the second half of 2020.

The market is reaching a balance point, where prices are no longer rising as quickly as they were before. Some experts are even calling for a correction to housing prices in the next year or so.

When choosing a mortgage, consider the length of your term. A five-year fixed mortgage term provides protection from interest-rate volatility, but you can't change your mind or take advantage of lower rates until your term comes up for renewal.

Shorter-term mortgage rates, like two-year fixed terms, offer flexibility to make a new decision about your mortgage three years sooner. However, these rates are higher than five-year options.

It's essential to assess your personal financial strategy and risk tolerance when selecting the length of term for your mortgage. This will help you make an informed decision that suits your needs.

For another approach, see: What Happens to Mortgage Rates When Fed Cuts Rates

A HELOC rate is a variable interest rate based on the prime rate, making it a popular option for accessing funds for home improvements, debt consolidation, or other expenses.

Typically, HELOC rates are lower than other forms of credit, which is why many homeowners choose this option.

You can borrow against the equity in your home as needed with a HELOC, similar to using a credit card.

Check this out: Heloc Rates Canada

A variable rate lock-in decision can be a complex one, but understanding the basics can help you make an informed choice.

Variable rate mortgages have a lower interest rate compared to fixed rate mortgages, but it can increase over time.

This means your monthly payments can rise significantly if the interest rate increases.

Typically, variable rate mortgages have a floor rate, which is the minimum interest rate you'll pay, and a cap rate, which is the maximum interest rate you'll pay.

For example, a variable rate mortgage might have a floor rate of 2% and a cap rate of 5%.

The difference between the floor and cap rates is called the spread, and it can range from 1% to 3%.

If you're considering a variable rate lock-in, it's essential to review the terms and conditions of your mortgage agreement carefully.

Consider reading: Standard Variable Rate

A 5-year fixed-rate mortgage provides greater protection from interest-rate volatility, but you'll be locked into your rate for a longer period.

If you choose a 2-year fixed mortgage, you'll have the flexibility to make a new decision about your mortgage three years sooner.

However, shorter-term mortgage rates are higher than five-year options.

You'll need to assess your personal financial strategy and risk tolerance when selecting the length of term for your mortgage.

You might consider how you'll feel about potentially higher interest rates at renewal time if you opt for a shorter term.

Related reading: Mortgage Demand Falls amid Higher Interest Rates

When choosing a mortgage, you'll often come across two main types: full feature mortgages and restricted mortgages. The lowest rate you see advertised may not be what you want, as it could be for a restricted mortgage.

A full feature mortgage will have a higher interest rate, but it comes with desirable features like pre-payment options. This allows you to potentially pay off your loan faster, saving you thousands of dollars in interest fees.

Pre-payment options include monthly pre-payment and lump sum pre-payment. Monthly pre-payment lets you increase your monthly payment up to a certain percentage, while lump sum pre-payment allows you to pay off up to 25% of your mortgage loan.

A fresh viewpoint: Pre Approval Mortgage Rates

Porting your mortgage is another feature of full feature mortgages. This means you can take your current mortgage and transfer it to another property, avoiding breaking your mortgage.

You'll also have the option to make multiple lump sum pre-payments to bring down your mortgage balance in a given calendar year. Most lenders will cap the amount of pre-payments you can make, such as 20% of your principal in a single year.

With a full feature mortgage, you can increase the size of your regular mortgage payments without incurring any penalties or fees. This payment flexibility is a major advantage over restricted mortgages.

Here's a quick comparison of the two:

Refinancing is a smart move for many homeowners. You can refinance your mortgage to lower your monthly payments, switch to a more favorable interest rate, or tap into your home's equity.

One of the main reasons people refinance is to take advantage of lower interest rates. This can save you a significant amount of money over the life of your loan.

See what others are reading: Lower You Mortgage Interest Rates

There are several tools that can help you make informed decisions about refinancing. A refinance calculator can give you an idea of how much you can save by refinancing, while a penalty calculator can help you understand any potential prepayment penalties.

Refinancing can also be a good way to consolidate debt. If you have multiple loans with high interest rates, refinancing into a single loan with a lower rate can simplify your finances and save you money.

To determine how much equity you have in your home, you can use a maximum equity calculator. This can help you decide whether refinancing is a good option for tapping into that equity.

For another approach, see: Mortgage Refinancing Activity Rises as Rates Drop.