Canada Mortgage Interest Rate Forecast: 2025-2029
Today’s Mortgage Rates
| 1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 4-Year Fixed | 5-Year Fixed | 5-Year Variable | |
|---|---|---|---|---|---|---|
| Lowest Rates | % | |||||
| Average Rates (10 Lenders) | ||||||
| 30-Days Change of Average Rates |
| Term | Lowest Rates | Average Rates (10 Lenders) | 30-Days Change of Average Rates |
|---|---|---|---|
| -Year Fixed | % | % | NaN bps lower |
| -Year Fixed | % | % | NaN bps lower |
| -Year Fixed | % | % | NaN bps lower |
| -Year Fixed | % | % | NaN bps lower |
| -Year Fixed | % | % | NaN bps lower |
| undefined-Year Variable | % | % | NaN bps lower |
The basket of 10 lenders includes: , BMO, TD, Scotiabank, RBC, National Bank, Desjardins, nesto, Tangerine, First National.
Forecast of Lowest Mortgage Interest Rates as of February 18, 2025
| Date | BoC Rate | Prime Rate | 5-Year Variable | 1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 5-Year Fixed |
|---|---|---|---|---|---|---|---|
| 2024-07-24 | 3% | 5.2% | 5.83% | 6.59% | 6.39% | 5.74% | 5.34% |
| 2025-06-30 | 2.75% | 4.95% | 3.85% | 4.67% | 4.14% | 3.84% | 3.94% |
| 2025-12-31 | 2.5% | 4.7% | 3.6% | 4.62% | 4.12% | 3.84% | 3.97% |
| 2026-06-30 | 2.5% | 4.7% | 3.6% | 4.63% | 4.14% | 3.87% | 4.01% |
| 2026-12-31 | 2.5% | 4.7% | 3.6% | 4.66% | 4.17% | 3.91% | 4.07% |
| 2027-06-30 | 2.5% | 4.7% | 3.6% | 4.68% | 4.2% | 3.97% | 4.12% |
| 2027-12-30 | 2.5% | 4.7% | 3.6% | 4.71% | 4.26% | 4.02% | 4.18% |
| 2028-06-30 | 2.5% | 4.7% | 3.6% | 4.76% | 4.33% | 4.09% | 4.24% |
| 2028-12-30 | 2.75% | 4.95% | 3.85% | 4.85% | 4.4% | 4.16% | 4.31% |
| 2029-06-30 | 2.75% | 4.95% | 3.85% | 4.92% | 4.47% | 4.22% | 4.37% |
| 2029-12-31 | 2.75% | 4.95% | 3.85% | 4.99% | 4.53% | 4.28% | 4.43% |
| This table is populated based on the forward CORRA (Canadian Overnight Repo Rate Average) on February 18, 2025. These forecasts change frequently as market prices change. In making these forecasts, we have assumed the risk premium and the term premium to stay constant and market expectation of the risk-free rate to be correct. | |||||||
Tariffs' Effect on Interest Rates
The Canadian-US Trade Relationship and Economic Specialization
Since the North American Free Trade Agreement (NAFTA) took effect in 1994, the Canadian economy has become increasingly specialized. The resource sector expanded in oil and gas (particularly oil sands), mining, and forestry products. Manufacturing underwent significant changes, with lower-wage production moving to Mexico while Canadian manufacturing shifted toward higher-value products and resource-linked goods. The auto sector maintained its importance but evolved toward specialized component production. Regionally, Western Canada focused on resources, Ontario retained advanced manufacturing while losing traditional manufacturing, and Quebec developed strengths in aerospace and high-tech sectors. This specialization has made Canada particularly vulnerable to trade disruptions.
Would Canada Respond to US Tariffs?
The new US president's proposed 25% blanket tariff on Canadian goods would necessitate a Canadian response for several reasons:
- Economic Protection: To counter the disadvantage Canadian companies would face in the US market by giving them an advantage in the domestic market
- Political Pressure: To demonstrate responsiveness to affected businesses and workers
- Deterrence: To signal that unilateral trade actions will face consequences
- Negotiating Leverage: To maintain a strong position in future trade discussions
- Precedent: To prevent similar actions from other trading partners
Impact on Monetary Policy
The proposed tariffs would create complex challenges for the Bank of Canada's monetary policy. Typically, the Bank adjusts interest rates to maintain target inflation – lowering rates when inflation falls below target to stimulate demand and raising rates when inflation exceeds target to cool demand.
A large-scale tariff implementation would create mixed effects:
- First Round: Market reaction to tariff announcements, leading to delayed investment and hiring decisions
- Second Round: Oversupply and possibly deflation in goods typically exported to the US, while inflation in goods typically imported from the US
- Third Round: Reduced employment in industries exporting to the US
- Fourth Round: Broader employment and demand reduction across various sectors
The Bank of Canada is analyzing multiple scenarios to determine appropriate monetary policy responses once tariff details emerge. Current analysis suggests the tariffs would likely have a net disinflationary effect, potentially leading to lower policy rates than otherwise planned. However, if the government chooses to support affected workers and industries through increased borrowing and spending, the overall effect could become inflationary.
How Does the Market Think About Future Rates?
Changes in the Bank of Canada (BoC) policy rate and Canada’s prime rate as implied by the forward contracts on Canadian Overnight Repo Rate Average (CORRA) as of February 17, 2025.
| Fixed Announce-ment Date | Likelihood of BoC policy rate at | is | Likelihood of BoC policy rate at | is |
|---|---|---|---|---|
| 2025-03-12 | 3% | 74% | 2.75% | 26% |
| 2025-04-16 | 3% | 35% | 2.75% | 65% |
| 2025-06-04 | 2.5% | 8% | 2.75% | 92% |
| 2025-07-30 | 2.5% | 41% | 2.75% | 59% |
| 2025-09-17 | 2.5% | 59% | 2.75% | 41% |
| 2025-10-29 | 2.5% | 72% | 2.75% | 28% |
| 2025-12-10 | 2.5% | 91% | 2.75% | 9% |
What You Should Know
- In July 2023, overnight interest rate climbed to 5%, the highest since 2001. Bank of Canada (BoC) had to raise rates because inflation was very high and the labour market was very tight.
- By June 2024, inflation had significantly declined, and significant slack had been created in the labour market. Thus, the BoC started lowering its policy rate.
- At the end of January 2025, the policy rate of 3% is close to what could be considered neutral. However, with the U.S. becoming an unreliable trading partner and in the absence of significant domestic reform, Canada faces a less efficient economy, which implies a lower neutral rate. Further tariffs would throw the Canadian economy out of equilibrium, and restoring balance would likely require lower rates as past investments lose value and new investments become necessary.
- The long-term trend of declining yields has ended, and we are unlikely to see low rates like those of 2020-2021 or 2009-2010 again.
Bank of Canada Rate Forecast for 2025: Further Decline in the Overnight Rate
By late January 2025, inflation is fluctuating around the Bank of Canada’s 2% target, while the policy rate of 3% is near neutral. The only persistently high component of CPI inflation is shelter, rising 4.5% due to increasing rent and mortgage interest costs. However, rent growth is slowing as population growth moderates (due to changes in immigration policies) and mortgage rates are easing as overall interest rates decline.
Unfortunately, a major economic disruption looms just as Canada seems to be achieving a soft landing. The U.S. has threatened a 25% tariff on all Canadian goods, a move that could severely impact multiple sectors of the economy.
- Oil & Energy: Most of Alberta’s oil exports flow through pipelines to U.S. refineries, making Canadian producers highly dependent on the U.S. market. While oil swaps between Canadian and American producers could theoretically reduce direct trade exposure, such arrangements are complex and difficult to implement.
- Automotive Industry: The Ontario-Michigan auto industry is deeply integrated, with car parts crossing the border multiple times before final assembly. A 25% tariff at each crossing would make this system unworkable, threatening both industries.
- Forestry and lumber, Agriculture and agri-food, Aerospace, Steel and aluminum, Mining and minerals, Alcohol and beverages, and Consumer Goods and retail are other industries that would be negatively affected by a trade war.
Given this trade uncertainty, forecasting the Canadian economy’s trajectory in 2025 is highly challenging. If U.S. tariffs take effect and remain for an extended period, Canada will likely face:
- Lower economic growth
- Higher unemployment
- Slightly lower policy rates
The best response to mitigate these tariff effects would be to stimulate domestic economic growth through non-U.S.-dependent strategies, such as removing interprovincial trade barriers and simplifying regulations to enhance competitiveness.
Importance of Mortgage Rates
Canadian homes’ average price is around $670k. Thus, an average home buyer who has saved over 20% ($150k) for their down payment to reduce their risk and save on mortgage insurance premiums requires a mortgage of around $520k.
Currently, Canada’s interest rate environment is such that advertised mortgage rates range from 4.14% to over 6.5%. So if you are shopping for a mortgage, 4.5% is a reasonable rate depending on the term and features of your mortgage.
WOWA’s mortgage interest calculator shows that conservatively buying an average house with a competitive mortgage rate and a typical 25 year amortization would translate into a monthly mortgage payment of $2,880, initially including $1,930 in interest costs.
The median after-tax income for a Canadian family is $70.5K per year, around $5,880 per month. It is easy to see that mortgage expenses are the most significant expense for a Canadian family (49% for mortgage payment). The mortgage expense is much more for those living in the most expensive Canadian population centers of the Greater Toronto Area (GTA) and the Greater Vancouver Area (GVA). So optimizing your mortgage expense might be the most effective way of improving your finances.
Deducing Market Expectations
Financial institutions consider both depositing money with the Bank of Canada (BoC) and buying treasuries as risk-free investments. When managing their liquidity, these institutions will choose whichever option offers the higher yield. According to the expectations hypothesis, the yield on a Canadian Treasury bill should equal the average of expected BoC rates over the T-bill's maturity period.
This relationship enables us to derive market expectations for the BoC's target policy rate by analyzing money market instrument yields. While various interest rates exist in the market, some provide more direct insights into expected future rates.
The Canadian Overnight Repo Rate Average (CORRA) forward contract rates offer a particularly efficient method for calculating expected changes in the BoC policy rate. CORRA serves as a key financial benchmark that measures the cost of overnight lending and borrowing between major financial institutions in Canada, with Government of Canada securities serving as collateral.
Key points about CORRA:
- Purpose: CORRA is used to reflect the conditions of the overnight funding market and is a critical reference rate for various financial instruments, including loans, derivatives, and other securities.
- Calculation: CORRA is calculated by taking a trimmed average of the rates on overnight repo transactions that involve Government of Canada securities. This means it excludes the highest and lowest rates to avoid skewed results.
- Benchmark: As a benchmark interest rate, CORRA is an important indicator of monetary policy and financial stability. It helps set the cost of borrowing and lending in the short term.
- Administration: The Bank of Canada oversees the CORRA benchmark to ensure its reliability and accuracy.
- Usage: CORRA is widely used by financial institutions, corporations, and investors to price, trade, and manage interest rate risk in the Canadian financial markets.
Macroeconomic Factors Affecting Interest Rates?
Over the past few decades, technological advancements and globalization have been significant deflationary forces, contributing to a long-term decline in interest rates. Lower rates have facilitated higher levels of debt across the economy. Historically, between 1968 and 2001, interest rates were frequently higher than their 2023 highs. However, the economic landscape has evolved considerably, particularly in Western economies, with Canada experiencing notable structural changes. Debt levels are now substantially higher than in the 20th century, making it increasingly challenging to sustain high-interest rates in the 2020s.
General Government Gross Debt
Total Credit Liabilities of Households
Since 1990, general government debt has expanded 5.5 times, while household debt has surged 8.5 times. The rising household debt burden can be attributed to higher income levels, declining interest rates, and relatively stable debt service ratios. Household income in Canada has been growing significantly faster than the population. Since 1990, the population has increased by approximately 51%, whereashousehold income has surged by 332%. Over the same period, inflation has totalled 102%, meaning that, when adjusted for both inflation and population growth, household income has effectively risen by 42%.
Total Household Income in Canada
However, it is also notable that debt interest payments as a percentage of household income reached their highest level since 1996 in 2023.
Debt Service Ratio for Canadian Households
The total debt service ratio has increased from about 12% in the early 1990s to around 15% recently. Note that interest rates for non-mortgage debt are often much higher than a mortgage. As a result, mortgage and non-mortgage debt service ratios are comparable, while mortgage debts are much larger than non-mortgage debts (about three-quarters of Canadian household debt is mortgage debt).
Nature of Interest Rates
We can think of interest as a price for using money, yet interest differs from rent because money differs from real property. The intersection of the supply and demand curves for rental properties determines rents. Money is different from rental properties because the supply of money is unlimited.
Bank of Canada, Federal Reserve or any other central bank can buy an asset or make a loan by crediting the seller's or borrower's account. In this purchase or loan process, new money is created. More interestingly, when a commercial bank uses depositors’ money to make loans, it creates money. Because the depositors still have their money, while those who have received the loans also have the money and can spend it.
On the other hand, when a central bank sells an asset or receives a loan payment, money is destroyed. Similarly, when a commercial bank receives loan principal payments, money is destroyed (annihilated). This temporary nature of money allows policymakers to set its rent (interest rate).
In Canada, the Bank of Canada (BoC) has several responsibilities. The most important mandate of the Bank of Canada is achieving price stability. BoC has agreed with the Department of Finance to define price stability as having a 2% CPI inflation rate.
Interest Rate Determinants
| Factors that push interest rates higher | Factors that pull interest rates lower |
| High inflation | Low inflation |
| Low savings rate | High savings rate |
| Decreasing trade | Increasing trade |
| Risk of default | Loan security |
| Decrease in labour productivity | Increase in labour productivity |
| High employment | Low employment |
How do Mortgage Lenders Fund Mortgages?
To understand how we can save on our mortgage costs, we should understand how mortgages work in Canada. A bank can use deposits it is holding to lend out a mortgage. The first problem with using depositor money for lending a mortgage is that those who have deposited their funds in a chequing account or a savings account might want their money back at any time.
In contrast, a mortgage borrower would repay his debt on a predetermined schedule over many years. So the bank would have to put aside some money to provide liquidity to its depositors.
Moreover, the bank might lose money on this loan if the borrower fails to make their scheduled payments and becomes delinquent. Thus such a mortgage would increase the amount of capital the bank requires. Still, because the loan is secured by real estate, it is pretty safe, and the added capital requirement it imposes on the bank is relatively small.
The three preceding paragraphs explained how a home equity line of credit (HELOC) works. HELOC interest rates are often slightly higher than the prime rate. Looking at variable mortgage interest rates, we see that most lenders offer rates below the prime rates (and below HELOC rates). OSFI regulation imposes a HELOC limit of 65% of the property value. In comparison, conventional mortgages can be up to 80% of the property value, and high ratio (insured) mortgages can be up to 95% of the property value.
Because of their lower loan-to-value (LTV) ratio, HELOCs pose a lower risk to lenders than mortgages. We know an interest rate comprises a risk-free rate plus a risk premium. So why do HELOCs, despite their lower risk, have a higher rate than residential mortgages?
Mortgage rates in Canada are relatively low in part because legislation created frameworks to transform mortgages into safe and liquid assets. There are two main securitization instruments:
- Under the National Housing Act, lenders can pool insured mortgages to create NHA Mortgage-Backed Securities (NHA MBS), which are guaranteed by CMHC.
- Under the Bank Act, lenders can create special-purpose vehicles and transfer mortgages into these entities to issue covered bonds.
These frameworks reduce mortgage rates through several mechanisms:
First, when mortgages can be easily sold (are liquid), banks face lower liquidity costs. Without securitization, banks would need to hold significant low-yielding liquid assets to offset their illiquid mortgage portfolio, increasing their overall cost of funds. Securitization reduces this need, lowering funding costs.
Second, liquid assets improve banks' risk management. In stress scenarios, banks can sell liquid assets rather than raise expensive emergency capital that would dilute shareholders. This reduced risk translates into lower required returns.
Third, securitization creates standardized, tradeable securities that attract a broader investor base, including pension funds and insurance companies seeking long-term fixed-income assets. This increased demand and competition for mortgage exposure drives down yields.
Finally, the government guarantee on NHA MBS eliminates credit risk for investors, allowing them to accept lower yields than they would demand for direct mortgage exposure.
Together, these factors enable Canadian financial institutions to offer mortgages at rates materially lower than their prime lending rates.
What About Fixed Rate Mortgages?
Covered bond programs reduce funding costs for Canadian lenders by transforming their mortgage assets into liquid assets. However, lenders face another challenge: many borrowers want fixed-rate mortgages, while a lender's cost of funds typically varies with market interest rates. This creates interest rate risk that lenders must manage.
Since the interest rates paid on deposits and other funding sources typically move with market rates, using these variable-rate funding sources to make fixed-rate mortgage loans creates interest rate risk for the lender. To manage this mismatch, banks use various hedging strategies.
Interest rate swaps are a key tool for hedging this risk. These contracts allow banks to exchange variable-rate interest payments for fixed-rate interest payments. Several types of swaps exist in financial markets:
- Interest Rate Swaps: Exchange fixed and floating interest payments based on a notional principal amount
- Currency Swaps: Exchange principal and interest payments between different currencies
- Commodity Swaps: Exchange cash flows based on commodity prices
- Equity Swaps: Exchange cash flows based on stock or index performance
- Credit Default Swaps: Exchange payments based on credit events like defaults
A particularly important type of interest rate swap is the Overnight Index Swap (OIS). In an OIS, parties exchange the difference between an overnight interest rate index and a fixed rate. The overnight rate is typically a benchmark like CORRA (Canadian Overnight Repo Rate Average) in Canada.
OIS contracts serve as a risk management tool for institutions exposed to overnight rate fluctuations. They are marked-to-market and settled daily, with the swap value recalculated based on changes in the overnight rate."
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.