Canadian Mortgage Rate Forecast

2025-2026 Outlook: The Great Unwinding

Direction

Downward

Next Cut

Jan 24

Prime Rate

5.95%

Target

3.00%

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Executive Summary: The 2025 Outlook

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• < span > Direction is Down: The Bank of Canada has firmly pivoted to rate cuts. We expect the overnight rate to fall to 2.50%-3.00% by late 2025.

< li class="flex items-start gap-2" > • < span > Variable Wins(Finally): For borrowers with risk tolerance, variable rates are mathematically projected to outperform fixed rates over the next 5 years. < li class="flex items-start gap-2" > • < span > The "Neutral" Target: Rates won't go back to 0%. The new "normal" for a 5-year fixed mortgage will likely settle between 3.5% and 4.0%. < li class="flex items-start gap-2" > • < span > Fixed Rate Floor: Bond yields have effectively priced in the cuts. Don't expect 5-year fixed rates to drop much below 3.7% unless a severe recession hits.

< p class="lead text-xl text-slate-600 mb-10" > If you're renewing your mortgage or buying a home in 2025, the single biggest question on your mind is: where are interest rates going? After three years of historic volatility—from the emergency lows of the pandemic to the inflation-fighting highs of 2023—Canadians are desperate for stability. The good news is that 2025 promises to be the year of the "Great Unwinding."

The era of aggressive rate hikes is over.The Bank of Canada has explicitly shifted its focus from crushing inflation to preventing a deep economic recession.This pivot changes everything for borrowers.But understanding < em > how far < /em> and how fast rates will fall is the difference between saving thousands of dollars and getting trapped in a costly mortgage product.

< h2 > The 2025 Landscape: From Inflation to Recession Watch

To forecast mortgage rates, you have to follow the money relative to the economy.In 2022 and 2023, the Canadian economy was "overheating"—too much money chasing too few goods.The Bank of Canada used high interest rates as a bucket of ice water to cool it down.

It worked.Maybe too well.

As we move through 2025, the narrative has flipped.Unemployment is ticking up.GDP growth per capita is negative.Business investment is stalling.The Bank of Canada is no longer worried about 8 % inflation; they are worried about undershooting their 2 % target and causing deflationary pressure.

< h3 > The Implications for Borrowers

When the economy is weak, central banks cut rates to encourage borrowing and spending.This is the wind at our backs for 2025.

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Variable Rates: These are directly tied to the Bank of Canada's actions. Every time Tiff Macklem cuts the overnight rate, your variable mortgage payment drops (or your principal portion increases).

Fixed Rates: These are tied to the bond market, specifically the 5-year Government of Canada bond yield. Bond traders are forward-looking. They have already priced in the expected cuts.This is why fixed rates dropped in late 2024 even before the Bank of Canada moved aggressively.

< h2 > The Forecast: Quarter by Quarter

While no one has a crystal ball, the consensus among Canada's "Big Six" banks and independent economists is remarkably aligned for the first time in years.

< h3 > Q1 - Q2 2025: The Aggressive Cuts

We expect the Bank of Canada to front - load its cuts in the first half of the year.The overnight rate, which started the easing cycle at 5.00 %, is projected to fall by 25 - 50 basis points at nearly every meeting until it reaches the 3.50 % range by summer.

< p > What this means for you: If you are in a variable mortgage, hang tight. Relief is arriving rapidly. If you are looking to lock in, be patient. Fixed rates may drift slightly lower, but the big moves will be on the variable side.

< h3 > Q3 - Q4 2025: Finding the Floor

By late 2025, we expect the pace of cuts to slow.The Bank will be looking for the "neutral rate"—the Goldilocks rate that neither stimulates nor restricts the economy.Most economists estimate this neutral rate to be between 2.25 % and 3.25 %.

< p > Prediction: We end 2025 with the Bank of Canada overnight rate sitting near 2.75%. This would put the Prime Rate (which is what your variable mortgage is based on) around 4.95%.

< h3 > 2026 and Beyond: The New Normal

Do not bank on rates returning to 1.5 %.Those pandemic - era rates were an anomaly caused by a global emergency.The "normal" cost of money in a healthy economy is typically inflation(2 %) plus a real return (1 - 2 %).That implies a mortgage rate of 3.5 % to 4.5 % is the long - term equilibrium.

< h2 > Variable vs.Fixed: The 2025 Strategy Guide

For the past two years, the standard advice was "lock in a short-term fixed rate to weather the storm." In 2025, the calculus has changed completely.

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The Case for Variable

< p class= "text-gray-600 text-sm mb-4" > If projected cuts materialize, variable rate holders will pay less interest over a 5 - year term than fixed rate holders.The spread between fixed(currently ~4 %) and variable(currently ~5 - 5.5 %) is wide, but it will compress rapidly.

< p class="font-bold text-blue-600 text-sm" > Best for: Borrowers with high risk tolerance and budget flexibility.

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The Case for Fixed

< p class= "text-gray-600 text-sm mb-4" > Fixed rates offer peace of mind.A 5 - year fixed at 3.99 % is historically decent.You avoid the risk of inflation reigniting(which would force rates up).However, you risk locking in near the top of the cycle locally.

< p class="font-bold text-green-600 text-sm" > Best for: First - time buyers pushing their max budget who cannot sleep at night worrying about the Bank of Canada.

< h3 > The "Hybrid" Strategy: 3 - Year Fixed

Many mortgage brokers are pivoting to the 3 - year fixed term as the "sweet spot." It offers a lower rate than variable < em > today , avoiding the immediate pain of high prime rates, but it matures in 2028—presumably when rates have fully normalized. This prevents you from being locked into a 5-year commitment if rates drop to 2.99% in 2026.

< h2 > The Bond Market Disconnect

It is important to understand why fixed rates might not drop much further, even if the Bank of Canada cuts aggressively.

Fixed rates follow the < strong > Government of Canada 5 - Year Bond Yield . Bond investors are smart. They anticipate future central bank moves. When you see a 5-year fixed rate of 3.89% while the Prime Rate is 5.95%, that is the bond market screaming "We know rates are going down!"

The "discount" is already baked in.For 5 - year fixed rates to drop to 2.99 %, bond yields would have to crash further.That usually only happens during a severe economic catastrophe.If you are waiting for a sub - 3 % fixed rate, you are effectively betting on a depression.Be careful what you wish for.

< h2 > The "Wildcard" Risks

Every forecast comes with an asterisk.Here are the three things that could blow up this prediction:

< h3 > 1. US Inflation Resurgence

Canada's economy generates about 30% of its GDP from exports to the USA. If the US economy overheats and their inflation spikes back to 5%, the Federal Reserve will raise rates. The Bank of Canada cannot let our rates drift too far below US rates, or the Canadian Dollar will crash (making imports expensive and re-igniting inflation here). If the US hikes, Canada's hands are tied.We might have to pause cuts even if our economy is weak.

< h3 > 2. Government Spending

Federal and provincial government spending has been stimulative.If governments continue to run massive deficits, they pump money into the economy, countering the Bank of Canada's efforts. This "fiscal dominance" forces interest rates to stay higher for longer to offset the public sector spending spree.

< h3 > 3. The Housing Market Itself

This is the nightmare scenario for the Bank of Canada: they cut rates to 3.5 %, and Canadians—seeing affordability return—rush into the housing market in a frenzy, driving prices up 20 % in a year.This creates asset inflation, which forces the Bank to stop cutting or even hike again.They are trying to thread a needle: cut rates enough to save the economy, but not enough to reignite the housing bonfire.

< h2 > Impact on Different Borrower Types < h3 > The Renewer

If you took a 5 - year fixed rate in 2020 at 1.99 %, you are facing a renewal in 2025 at ~4 %.Your payment will jump largely.

< p > Action Plan: DO NOT simply sign the renewal letter your bank sends in the mail. That is an "offer," typically at a higher "posted" rate. Shop around. In a renewing market, lenders are hungry for retention. A broker can often find you a rate 0.50% lower than your bank's renewal offer.

Consider extending your amortization.If you have 15 years left, you might be able to refinance back to 25 years.This lowers your monthly payment drasticially, though it increases your total interest cost significantly.It is a tool for cash flow survival, not wealth building.

< h3 > The First - Time Buyer

High rates have thinned the herd of competition.You are not competing with 20 other offers.You can place conditions.

< p > Action Plan: Qualify at the 3-year fixed rate. Use the new 30-year amortization rules if you are buying a new build or (if eligible) an insured home. The goal is to get in the door. You can aggressively pay down the principal later when your income rises.

< h3 > The Investor

Cash flow is improving, but it is still negative for 80 % of rental properties bought with 20 % down.

< p > Action Plan: Variable rates are your friend. If you expect rents to rise (due to low vacancy) and rates to fall, your cash flow picture improves every single month of 2025.

< h2 > What About 2026 ?

By 2026, we expect the housing market to have "normalized." The backlog of demand from 2023 - 2024 will have largely been absorbed.Rates will be stable in the 3.5 % -4.0 % range.We will return to a market driven by fundamentals: income growth, population growth, and supply.

This will be a boring market.And after the chaos of the 2020s, boring is exactly what Canadians should be praying for.

< p > Disclaimer: This article provides general analysis and should not be considered financial advice.Mortgage rates change daily.Consult with a qualified mortgage broker for your specific situation.