In a move that defies economic logic, Trump has ignited an all-out trade war with Canada, slapping massive tariffs on its largest trading partner. A 25% tariff on Canadian goods imported into the USA, and a 10% levy on oil, electricity and natural gas are set to go into effect on Tues February 4, 2025.
The ripple effect will undoubtedly have wide reaching impact for our collective wallets and the Canadian economy.
But, how will this affect mortgage rates, home prices and borrowing conditions?
Here’s what you need to know and how to prepare.
What are Tariffs and How does this Impact Me?
Simply put, tariffs are a form of fax. When one country imposed a tariff (or tax) on another, it is ultimately imposed on a business doing the buying from the country that is supplying the goods.
Tariffs make prices go up and cost of goods more expensive because any tax paid by a business to obtain goods (either for direct resale in the buying business’ country of origin OR for the purposes of additional manufacture) would eventually be passed to the end consumer, to offset the higher price needed to obtain the goods.
As an example, Florida grown oranges/orange juice was listed as a targeted item to receive Canadian tariffs. Therefore, if your neighbourhood grocery store purchases these items to stock its shelves, the retailer will have to pay the tariff to the Canadian government, in order to make it available for sale.
Alternatively, if an item being imported is required to further manufacture an item- think raw goods like steel, aluminum, lumber, electricity, oil, etc. – the imported item or raw goods would also be taxed on the company requiring it to manufacture their final product. A great example of this is how vehicles are currently made in North America. Various car parts are made in US, Canada and Mexico respectively, with the final assembly done in one or several countries.
In the long run, these added unnecessary production or acquisition costs caused by imposing tariffs would eventually be passed to consumers as higher sales prices. Worst case, these higher costs can slow business production, sales and lead to lay offs, lower business investments and a retraction of the economy, if it becomes cost prohibitive to make things here in Canada or do business with another country such as the USA.
Key Economic Impacts to Watch
🔻 Recession Warning: Canada’s economy could enter a recession within 5-6 months, if these tariffs remain. Expect job losses, business closures, and reduced foreign investment.
📈 Inflation Spike: With tariffs driving up prices on goods and energy, the Bank of Canada estimates a 0.8%-1.3% inflation surge over the next two years.
🔺 Rising Mortgage Defaults: Unemployment could push mortgage arrears up by 50% (by late 2025-2026), leading to more cautious lending and potential tightening of credit and policies.
💰 The Canadian Dollar has plunged to 20 yr lows, further complicating the economic landscape
📉 Volatile Interest Rates:
- U.S. inflation from tariffs could also spill over, further complicating Canadian rate movements
- If recession fears dominate, the Bank of Canada may cut rates
- Inflation concerns could push longer-term rates higher
What This Means for Homeowners, Real Estate Investors and Buyers
Short-term outlook:
- Variable mortgage rates will likely continue to decline, if the Bank of Canada (BoC) maintains it current rate cutting policy (Prime lending), in response to recession fears. Most economists still predict further rate cuts to the overnight lending rate in 2025
- Fixed mortgage rate volatility is expected as bond markets react to the reality of longer term tariffs implications
- Real estate activity continue – the Spring housing market is expected to be robust, caused by lower mortgage rates today and housing demand
- Employment uncertainty – if you are in an industry or business impacted by this tariff war, consider engaging your mortgage professional or lender before things worsen financially to devise proactive financing options or mortgage repayment strategies should you eventually experience a decrease in your income or are laid off
Long-term outlook:
- Fixed mortgage rates may rise if inflation expectations increase and credit spreads widen
- Variable mortgage rate outlook is uncertain – the BoC already signalled in their Jan 29, 2025 policy announcement they cannot predict how inflation will respond to a long term tariff war. Past inflation surprises (like in 2021-2023) has shown how quickly variable interest rates can change when inflation rises.
- Real Estate Activity may slow, with lower consumer confidence and rising unemployment
- Property Valuations will be impacted – both home sales and home prices.
Navigating Mortgage Decisions – Practical Tips
🏠 Mortgage Planning is Key: Rates may fall before they rise again. Speaking to a qualified mortgage professional sooner than later can help you take advantage of lower rates available
📊 Variable Rates are still viable for risk-tolerant borrowers. However, mortgage consumers who want in on the lower rates available with variable mortgages products, but the prefer the budget stability of fixed payments should consider taking a static-payment variable product
🔹 Taking a hybrid mortgage (mix of fixed and variable rates) while less popular, can provide balance and protection against rate surprises
💡 Liquidity Matters: Cash is king. If (and when), financial conditions tighten, homeowners should proactively prepare by building a budget buffer, minimizing unnecessary debt, obtaining home equity loans and lines of credit, refinancing, taking advantage of early renewal opportunities or mortgage re-amortization options to ensure financial flexibility and liquidity. Lending institutions typically react by tightening access to credit as a knee-jerk reaction to economic uncertainty or unfavourable economic outlook
👀 Stay abreast of economic updates and work with a mortgage professional to navigate rate and mortgage policy changes
📢 Act, Don’t React: If you’re considering a mortgage, refinancing, renewing or buying a home, don’t wait for the market to decide for you.
Conclusion
The trade war’s long-term implications remain uncertain, but the mortgage market must brace for economic turbulence.
Whether inflation, rate cuts, or rising defaults dominate the landscape, proactive mortgage planning and financial preparedness will be crucial. If you’re making mortgage decisions, consider strategies that give you flexibility—because in today’s economy, anything can happen.
Statistical & Information Credit – mortgagelogic.news
