Here’s a breakdown of the 7 most anticipated Canadian mortgage, housing and personal financial trends for the coming year
- Variable Rates – The Ultimate Comeback Kid
- Stagnant Fixed Rate Outlook
- Shorter Term Selections Not Just a Fad
- Weaker Canadian Dollar
- Mortgage Stress-test Relief Measures Makes Mortgage Shopping More Competitive
- Additional Mortgage Policy Changes Impacting Affordability
- Buyers Back in the Market Signal Home Price Gains
Variable Rates – The Ultimate Comeback Kid
In recent years, variable mortgages took a beating – and a negative rap – following post-pandemic inflationary policy decisions by the Bank of Canada (BoC). Skyrocketing Prime lending rates led to many mortgage holders grappling with suddenly higher mortgage payments and cash flow woes; either because their payments were forced to reset as Prime increased or when they hit their mortgage’s contractual trigger rate.
In addition, the trickle down effect saw variable mortgage holders with ‘static’ or ‘fixed’ payments have their effective remaining mortgage amortizations unknowingly extend to timelines greater than 30 or 35 yrs, and it also led to a slow down in housing sales activity due to rapidly falling home prices as buyers sat on the sidelines for affordability reasons.
All that is expected to change in 2025, as variable rates make a strong comeback. It will likely be the most affordable mortgage option available to Canadian mortgage consumers by mid-year, as the BoC continues cutting its benchmark rate. While it has already dropped the benchmark lending rate 1.75% since June 2024, economists predict further cuts will slow and eventually subside when the benchmark rate falls between 2.5 to 3%.
While there are no clear consensus by leading economists on the number of Prime rate cuts we can expect (see chart below), additional cuts are certain as the Central Bank has indicated they are in rate-cutting mode. As such, variable rate mortgages could dip below 4% by mid 2025. However, variable rate holders should anticipate that all future interest-rate decisions by the BoC will be more measured as inflation and overall economic performance key factors influencing their decision making. We should expect an overall slower pace of rate cuts passed along.
In short, these previous and anticipated rate cuts are easing the burden and affordability for many borrowers.
Source: Canadian Mortgage Trends
Stagnant Fixed Rate Outlook
After seeing a slight downward trend in 2024, economists are predicting stagnant fixed mortgage rates into 2025. Earlier fixed rate declines were ‘anticipatory’, based on the market expecting the BoC would begin cutting the Prime lending rate by mid 2024.
However, since last August, bond market volatility has persisted largely due to market doubts as to whether the US Federal Reserve’s interest rate policy decisions would net similar aggressive rate cuts vs. market expectations. During this time, the bond market predicted twice as many Prime rate decreases than what the US Federal Reserve eventually passed or will continue to provide, including a paltry 0.25% rate decrease on Dec 18, 2024. These market expectation ‘misses’, sticky inflation and other uncertain economic headwinds from a second Trump presidency will largely limit further bond market movements and in turn fixed mortgage interest rates for the near term. In addition, individual lending institution appetite to offer competitive rates vs. securing fatter profits based on maintaining larger rate spreads will impact offerings.
Fixed rate have likely temporarily reached their floor, which is currently around 4-4.5%. Mortgage holders should not anticipate further gains on the fixed rate side until we learn more about the impact of American tariffs. Therefore, if you are in the market for a fixed mortgage rate, especially if you are, according to CMHC among the 1.2 million fixed rate mortgage borrowers with a mortgage maturing in 2025, it is highly recommended to do your research and/or employ the services of a mortgage broker. Rate offerings can vary depending on an individual lending institution’s appetite to offer new and/or existing customers competitive rates vs. securing fatter profits from maintaining larger rate spreads.
Shorter Term Selections Not Just a Fad
As a response to ‘sticker shock’ many mortgage borrowers faced when renewing their mortgages in 2024, the mortgage industry noticed a trend towards consumers selecting or being recommended shorter mortgage terms of 2-4 years.
While 5 yr fixed rates have historically been favoured by mortgage holders due to lenders attaching their best rates to these terms, in a declining interest rate environment, they are considered a risky investment. Locking into today’s inflated mortgage rates may mean losing potentially hundreds or thousands in interest rate savings compared to variables rate offerings or future fixed rates when market yields reset lower.
Shorter terms are also advantageous because traditionally, breaking a fixed rate mortgage with one or two years remaining in the term allows for a smaller interest penalty calculation compared to the equivalent calculation based on a longer timeline left in the original mortgage.
Taking a short term, fixed rate mortgage is a smart money move if you crave the stability and peace of mind of a fixed rate, with a desire for flexibility and ability to make mortgage changes as market conditions improve. According to CMHC data, 56% of all mortgages were between three and five year terms, compared to 22% a few years earlier by Oct 2022. Today, many of the best 3 y r fixed rates are on par with their 5 yr rate offerings*
Weaker Canadian Dollar
In 2025, the economic consensus is that our loonie will continue to head south – and not for a vacation!
During the past year, it fell nearly 8% against the US Dollar hitting a record low below $0.69.
Reasons for the weakening in our currency include:
- high unemployment
- the BoC’s aggressive rate cutting measures in 2024
- Weak Canadian economic productivity and financial policy disparities between Canada and the US
- Concerns around potential tariffs under the incoming Trump Administration
Only after the dust settles on the latter point and the economy picks up will we likely see a valuation bounce back with the Canadian dollar.
A weaker dollar impacts both investors and homeowners alike. It drives up import costs and adds additional affordability challenges to an already fragile consumer population. As an example, food prices are expected to rise by 4-6% in 2025, due to our declining dollar. Less disposable income for tighter households could mean more credit and financial stress and a reliance on more costly forms of borrowing or taking on more debt.
The larger ripple effect is that a weaker dollar leads to higher import prices for certain goods and services with an overall rise in cost of living. Manufacturing based industries like home builders are vulnerable to these rising costs, impacting housing availability and affordability. Not what is needed with a national tight housing supply!
If domestic economic activity and investments grows substantively as a result of the aforementioned reasons for a declining loonie, then it would materially impact the BoC’s decision to continue further cutting interest rates. Variable mortgage holders, those with home equity secured lines of credit (HELOC’s), and other lending tied to Bank Prime would eventually see a slow down and eventual pause in receiving additional Prime rate cuts.
Mortgage Stress-test Relief Measures Makes Mortgage Shopping More Competitive
Are you in the market for a new mortgage in 2025?
The good news is that as of Nov 21, 2024, Canada’s banking regulator, OFSI amended its mortgage qualification guidelines for borrowers with a maturing mortgage, being switched to another financial institution.
Heralded by the brokering community and consumer advocates as a ‘win’ for the mortgage borrower, it meant a borrower no longer needed to prove they could first afford a mortgage assuming an interest rate 2% higher than market rates they were seeking! Not only does this improve affordability because less income is needed to qualify for a better renewal rate, it also improves competition as more clients are not forced into a straight renewal by their existing lender, simply because they could not qualify to get another mortgage elsewhere.
The changes allow the removal of the mortgage ‘stress test‘ on insurable and uninsured mortgages, that are maturing and being switched to another financial institution, so long as the mortgage amount and amortization does not change and originated from a federally-regulated financial institution. This policy was technically already in place for insured, high-ratio mortgages, but recently clarified in an Oct 2023 memo to the mortgage community
While not every financial institution has publicly adapted these changes or have chosen to implement ‘creative’ adaptations of this policy decision, if you are seeking a better rate at maturity and uncertain whether you can take advantage of this new policy, reach out for a complementary mortgage strategy review to determine applicable options and pricing
Additional Mortgage Policy Changes Impacting Affordability
The Liberal government introduced several important mortgage policy reforms in 2024, aimed at improving housing availability and mortgage affordability for all Canadians, especially repeat (i.e. move up) and first time home buyers. While several came into effect a few short weeks ago on Dec 15, 2024, others are poised to begin in early 2025.
Here is a summary of these programs and initiatives:
- Increases to the insured mortgage cap from $1M to $1.5M
- Expansion of 30 yr mortgage amortizations on insured mortgage loans for first time buyers and for purchasers of new construction homes (for personal occupancy or a close relative) with no material changes to the applicable
- Revised secondary suite (i.e. rental property) mortgage refinance program aimed as encouraging and assisting existing home & property owners with building legal or legal conforming secondary suites to improve housing supply and mortgage affordability. Eligible secondary suite loans and grants are also available up to $80K with low initial interest rates
- Expanding the foreign buyer ban until 2027
- Introduction of a new mortgage stress-test – LTI (loan-to-income) aimed at curtailing the number of higher indebted borrowers a lender can have in their portfolio, particularly impacting certain niche mortgage products that provide more flexible lending criteria and/or allows a mortgage applicant to stretch their mortgage loan size greater than 4.5x their qualifying income allows
Recent federal housing measures, such as extended mortgage amortizations, may appear as a lifeline for Canadians facing rising rates or home affordability challenges. However, several policies bring concerns and unintended consequences.
For instance, raising the insured mortgage cap from $1M to $1.5M aims to help buyers in expensive markets like Toronto and Vancouver afford detached homes rather than condos. Yet, the steep income and down payment requirements limit its reach to a small segment of buyers.
Two less-publicized policies—secondary suite financing programs and loan-to-income (LTI) lending restrictions—could have a broader impact on homeowners and mortgage holders.
The secondary suite program enables homeowners to access up to 90% of their home’s value to add rental units (e.g., basement apartments or laneway homes). This offers financially savvy investors or multi-generational families an opportunity to boost affordability through rental income. The program excludes short-term rentals like Airbnbs but supports long-term income stability.
Conversely, the LTI restriction aims to prevent borrowers from becoming over-leveraged as interest rates fall. It limits borrowing for those with more than 20% equity by assessing their total real estate-secured loans against qualifying income. Surprisingly, this policy targets borrowers who wouldn’t traditionally be seen as risky.
While intended to reduce lender risk, LTI policies vary by institution and apply only to new loans. Though full implementation is expected by early 2025, many lenders have already adjusted their criteria or increased rates on niche products like equity-based or net-worth based lending.
The Bottom Line: Mortgage approvals in 2025 will be more unpredictable. Thus using the services of a qualified mortgage professional who can properly assess your lending options amid the confusion and inconsistency to maximize your borrowing potential is key
Buyers Back in the Market Signal Home Price Gains
Real estate activity is poised to be strong heading into 2025, amid lower borrowing costs and favourable financing initiatives mentioned earlier.
According to Canadian Real Estate Association (CREA), there was a 26% increase in year-over-year homes sold, with Nov 2024 being the second straight month for gains in the sector. This is great news for existing home owners who saw equity erode when house prices sharply fell during the height of inflation in 2022 to 2023.
The market expectation is a 5-8% home price increase, as more buyers re-enter the housing market with renewed optimism and pent up demand, seeking to take advantage of deals, lower rates and better financing options.
Source: Canadian Mortgage Trends
According to Scotiabank economist Derek Holt, Canadian households have an additional $470M in savings than what was forecast pre-pandemic.
While may thought leaders predict a robust spring housing market, demand is expected to taper off by mid-2025 due to persistent supply issues that permeate in Ontario and B.C. Not even a cooling immigration policy can offset this housing demand.
Our advice to first time buyers? If you are in the market to buy but on a limited budget or cautious about making bold purchase moves, get pre-approved to better understand your affordability range and be prepared to buy sooner than later before competitive and activity drives up house prices further.
For existing home owners looking to cash in on improved home equity for other investments or for home renovations, etc. improved house values will provide more options to leverage the right amount of borrowing for your needs.
