2025 Mortgage Predictions: What to Expect and What We Hope For!
The past few years have been nothing short of a rollercoaster for Canada’s mortgage scene, and brace yourselves because 2025 is gearing up to make waves too. The aftermath of pandemic lockdowns and inflationary pressures are starting to recede, but the economic horizon is clouded with uncertainty, particularly with the tariff threats from the newly elected president of the United States. While the situation may seem precarious, some clear mortgage trends are beginning to emerge. Here’s the inside scoop for those considering a mortgage or looking at renewing their existing one.
Variable Mortgage Rates Make a Stunning Comeback
Our brokerage has been flooded with inquiries from clients eager to know if now is the moment to pivot to a variable rate mortgage. With the Bank of Canada’s benchmark rate slashing down to 3.25 percent from a hefty 5 percent just a few months back, and more cuts on the horizon, variable rates are poised to steal the spotlight as the most cost-effective borrowing option by mid-2025.
Economists are divided on just how low the benchmark rate will go. Some are predicting a final rate of 2.5 percent, while others hold a more conservative stance at 3 percent. But one thing’s for sure—borrowers can expect a few more cuts before we see the dust settle. After the latest rate cut, the top five-year variable mortgage rate has dipped to 4.35 percent, with potential to plummet into the mid-threes next year, depending on how aggressively the bank continues its cuts.
Fixed Mortgage Rates Hitting a Stalemate
On the flip side, fixed mortgage rates are currently lingering in the mid- to upper-4-percent range. This stagnation is largely due to high bond yields, which lenders lean on to set their fixed-rate options. Investor caution has put the brakes on optimism—especially with the looming tariffs and their potential inflationary implications. Since late August, Canada’s five-year bond yield has firmly settled in the upper-2 to 3 percent range, even as the Bank of Canada has continued to cut rates. Hence, borrowers shouldn’t expect much movement in fixed rates unless major reassurances about trade relations are provided in the coming months.
Central Banks Slowing Their Rate-Cutting Train
Now, let’s shift our gaze to our neighbors down south. The U.S. Federal Reserve is signaling a slower approach to rate cuts in 2025. In their recent announcement, the Fed cut its Federal Funds Rate by a quarter percentage point to a range of 4.25 to 4.5 percent, but the real shocker? Their economic projections now suggest only two rate cuts next year, down from the previously expected four. This shift, fueled by persistent inflation and stable GDP, sent both Canadian and American treasury yields soaring.
The Fed’s cautious stance mirrors the Bank of Canada’s approach, as both institutions prepare for a more moderated pace in rate decreases. Borrowers should brace for a more gradual drop in variable rates and a stubbornness in fixed rates as these economic policies unfold.
Shorter Terms on the Rise for Borrowers
While five-year fixed mortgage terms have been the go-to for many Canadian borrowers, they present a conundrum as rates trend downward. Committing to today’s higher five-year rates could lead to missing out on substantial savings as variable rates drop. Consequently, many borrowers are considering shorter fixed terms—think two or three years. This strategy provides the security of a fixed rate while allowing the flexibility to adjust when rates are more favorable.
Possible Benefits from New Mortgage Stress Test Policies
In a significant development, Canada’s banking regulator has updated its guidance on the mortgage stress test. As of November 21, borrowers switching to a new lender at renewal won’t need to undergo the stress test, provided their mortgage criteria remain unchanged and originated from a federally regulated institution. This change is seen as a win for the mortgage industry, which has long criticized the stress test for stifling competition.
However, some lenders are adapting creatively to this new regulation. While they may waive the test for insured renewals, they still plan to apply it to uninsured borrowers switching lenders. This cautious approach reflects lenders’ desire to manage risk, which has resulted in some inconsistency in client treatment.
The Future of the Mortgage Stress Test: Hope or Reality?
Historically, the mortgage stress test has provided a safety net for both borrowers and lenders, particularly during the interest rate surge of 2022-2023. Yet, it has faced backlash for limiting how much one can borrow. With borrowing costs now decreasing, there’s a growing argument for revisiting the two-percentage-point threshold. A return to a system based on the average of major banks’ posted fixed rates could eliminate confusion and foster a smoother lending process.
As new loan-to-income requirements roll out, tightening mortgage underwriting standards, the rationale for maintaining the stress test diminishes. Yet, whether we will see such a monumental shift in 2025 remains to be seen.