Mortgage Rate Forecast Canada 2024 - 2025: Rates Dropping (2024)

The next Bank of Canada interest rate announcement is on:

Wednesday, June 5, 2024

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The decisions Canadians make on their mortgage in 2024 largely depend on the mortgage rate forecast. It’s a decision that will affect homeowners for several years to come and could lead to thousands of dollars in mortgage interest savings.

Here, we will look at where mortgage rates are likely headed, based on a current, May 2024 review of economics, years of in-depth mortgage market study, and working with thousands of mortgage files.

These 4 main predictions will be reviewed (fully updated for May 2024):

1. Historical context: Mortgage rates will likely gravitate lower over the long term, to a historical trend in the mid-high 3% range.
2. The market consensus on the mortgage interest rate forecast in Canada is for the Central Bank to hold rates at 5% in June, then cut by 0.25% on July 24, with a full 0.50% of cuts in 2024.
3. Signs of economic slowdown, with fixed mortgage rates gradually dropping and a Central Bank of Canada rate drop seen as more likely in mid-late 2024.
4. How to reduce your risk against mortgage interest rate increases, best position yourself in this rate cycle, and save the most on your mortgage.

Historical context: Mortgage rates in Canada are forecasted to gravitate towards historical lows for the long term of 5 – 10 years.

To help determine mortgage rate forecast, one of the best perspectives we have available is a historical one.

During the great recession of 2008, the financial system and economy as a whole required bailouts and stimulus as never before seen, just to keep running. Thankfully, the stimulus did its job, and the economy rebounded and got back on track. However, between 2008 – 2019, for over 10 years, there was very low or stagnant GDP growth, and interest rates remained low accordingly.

During the ecovid pandemic, in 2020 – 2022, we witnessed a similar massive economic bailout. This time the stimulus was far greater, with over 40% of dollars ever created between 2020 – 2022.

However, in part due to a literal shutdown of the economy and of supply chains at one point and difficulty rebooting these supply chains, combined with excess consumer demand from pandemic savings, there is much more inflation as the economy stabilizes.

This inflationary difference will be discussed in more detail below. However, the main point here is that historically, when a massive new government and private debt are layered upon already massive debt, this can perpetuate dependence on yet ever cheaper debt to stimulate the economy long term. It can lead to long term economic stagnation and, importantly, to a ‘magnifying effect’ of increased rates.

More specifically, with 5 times more debt in the economy today, adjusted to inflation, than in the 1980s and early 90s, a single 0.25% rate increase makes an approximately 5 times bigger impact than it did when debt levels were a fraction of current levels. Accordingly, there is significant long term pressure for rates to remain low.

From another historical perspective, when rates increased in the 1980s from a base point of 10% to a 20% high point, this represented a 2x rate increase. However, a rate increase in 2022 – 2023 from a base point 0.25% to 5% represents a 20x rate increase, which will have a much greater shock to the economy.

Finally, the ‘neutral rate‘ or ‘target rate’ at the Central Bank of Canada, which is the rate seen as neither repressing nor stimulating the economy, is currently 2.5% – 3%. Given this, we may have 2% of Central Bank rate decreases in store (5% current down to 3%), and this, too, infers fixed and variable rates to stabilize in the mid-high 3% range.

Brent Richardson

Article Author, Mortgage Broker/ Owner

Certified Financial Planner (CFP)

Schedule a meeting with Brent

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As of May 2024, the market consensus on the mortgage rate forecast in Canada is for the Central Bank to hold the prime rate at 5% at its June 5, 2024 meeting and cut rates by 0.25% at its July 24 meeting.

The main tool we have when reading the current mortgage rate market is the Government of Canada Bond Yield. The Canadian bond is a government debt security that pays a return to an investor. The ‘%’ based return is called the ‘yield’ and is considered one of the safest investments because the Government would have to go bankrupt for it not to pay its investors.

The Government of Canada 5 year Bond Yield factors in all known economic data on a day to day, and even a minute to minute basis. Simply put – when the market/ bond traders think that the Central Bank of Canada will increase rates, the Bond Yield increases. When the Bond market thinks the Central Bank rate will decrease, then the yield drops. In other words, the Bond yield trades or is priced in anticipation of where the Central Bank of Canada rates will move. The Central Bank of Canada makes its rate decisions based on how it sees the economy performing.

Currently, as of May, 2024, as seen in the Yield chart below, the Canadian Bonds are pricing in the first Bank of Canada rate cut in July 2024 and a total of 0.50% worth of cuts in 2024.

As can be seen, over the past 6 months, the Bond Yield has come off its highs, but has been volatile, producing major swings as the financial markets attempt to determine how rate cuts may unfold. As economic data is released, we will likely see a continuation of volatility throughout the remainder of 2024. For example, on May 21, Stats Canada will release its CPI report (inflation report) and this could shift market predictions yet again.

Ultimately, the Bank of Canada is determined to get the job done by cooling the economy enough to bring inflation sustainably into the 2% range: Inflation is currently in the low 3% range, flirting with the high 2% range. We expect that throughout 2024, the Canadian economy and inflation will very slowly trend down. Indeed, the last few feet to the inflation ‘finish line’ are proving to be the most difficult.

Economic slowdown, lower inflation and lower Bond Yields. What does this mean for mortgage interest rates?

With lower spending comes a slowing economy, lower inflation, and eventually, lower mortgage interest rates.

Current high rates will lead to lower rates – by design.

As of May 2024, the Canadian economy is on the brink of recession, with only population growth and government stimulus keeping Canada out of recession at this point.

However, if we look at GDP per capita, or Canadas economy divided by the population size, Canada is well into a recession. More specifically, given this per capita GDP measure, there has been a year and a half of economic decline. Given this, Canada has seen no Real GDP growth ( Real GDP is economic growth removing inflation effects) since March 2018. In other words, that’s over 6 years of economic growth erased, again, excluding effects of inflation and on a per capita basis.

As consumer demand drops for goods and supply chains improve, prices of economic inputs such as copper, steel, silver, lumber, microchips, shipping costs and many other commodities have fallen drastically. These trends are very anti-inflationary. However, food costs and housing costs continue to be inflationary. With a slowing economy, these more inflationary areas of the economy have been cooling off.

It is known in economics and recently mentioned by the Central Bank of Canada that it takes 12-24 months for a single interest rate hike to ‘trickle through’ or have a full effect on slowing an economy. While the first small 0.25% interest rate hike in Canada happened in March 2022, as of May 2024, we have only started to see the full effects of the rate hikes of 2022.

As 2024 pushes onwards, we will likely see the effects of last year’s increases build momentum.

So it is important to keep in perspective that:

(1) The previous rate hikes we have seen have not had their full effect on slowing the economy, and we are already seeing a recession on the horizon.

(2) It is a matter of how long Canada can withstand such high rates before more significant negative economic impact.

Accordingly, the question is now focused on how long these high rates will remain.

As of May 2024, given this exceedingly weak ‘beneath the surface’ economic performance in Canada, the financial markets think this will take approximately 2 more months before rates are cut.

However, the most clear answer we have from the Central Bank of Canada, is that interest rates will remain at current levels until inflation is secure in the 2% range. At this point, as indicated by the Central Bank, the rate cutting cycle can begin. This does not indicate an exact time, but it provides us with good ideas of what to monitor and expect.

Financial Markets and the Central Bank of Canada more aligned in their thinking

The Bank of Canada stated in its February 2024 meeting, that it believes it will take well into the summer before inflation drops firmly into the 2% range. This is in line with what the financial markets are currently projecting for a July rate cut. Based on what the Central Bank itself is indicating, without directly saying this, there would not be any rate cuts until July 2024 at the earliest.

Although the Central Bank is still not providing specific guidance for a rate cut, this is the closest information we have from them. Also, Tiff Macklem, Governor of the Central Bank, has said loosely that he thinks rate cuts will happen in 2024.

It should be noted that the Bank of Canada often misses the mark with their projections. However in mi 2024, it appears that inflation and economic activity, particularly in the US, is not quite ready for a rate cut. In our opinion, in this volatile economic environment, its best to err on the side of caution, or in this case the first rate cut in the Fall.

So, what does this mean for mortgage rates?

What goes up to slow the economy will eventually come down to stimulate the economy.

The Central Bank of Canada (and the Federal Reserve in the USA) is determined to fight inflation, which is why they are seen as slamming the breaks on the economy as a whole. There is no doubt this, unfortunately, will be painful for many. However, low inflation is needed on a foundational level to enjoy another long-term run of low interest rates.

Eventually, the Central Banks will begin cutting to start increasing Real economic growth again. This means lower mortgage interest rates.

Its not a matter of if the Bank of Canada will cut rates, its a matter of when.

It should also be noted that, Canada generally needs to work in step with the US economy and their Fed rates. Otherwise, the Canadian dollar could sink substantially, which can cause inflation. In other words, even though Canada could enter technical recession before the US, the Central Bank of Canada may hold out a bit longer to drop the overnight rate, until a US recession is imminent.

While the variable rate mortgage is directly affected by the Central Bank decisions, we will likely see fixed rates generally trend lower throughout 2024, but not in a straight line as financial markets adjust their projections for the first cut.

Rates will not normalize at the lowest levels seen during covid. However, as fixed mortgage rates generally remain in a restrictive 5% range, the expectation is that rate normalization may occur into the mid-high ‘neutral rate’ range or in the high 3% – low 4% range for mortgage rates.

The CIBC Capital Markets projection from April 2022, seen just below, illustrates a good representation of this forecasted rate trend. However, given stubborn inflation, the Central Bank rate peak will clearly be higher than in the numbers indicated in the chart:

Again, while the exact numbers are not coming in as was expected in April 2022, the main thing to note from the chart is that the rates and bond yields are increasing into 2023, but then, towards the end of 2023 and into 2024, the bond yields are forecasted to drop, prompting a decrease in the Central Bank of Canada rate. This bigger-picture rate trend is the primary idea behind the chart.

How to reduce your risk against mortgage interest rate increases and save the most on your mortgage.

Unfortunately, there is no ‘good’ mortgage rate to lock into at this time of higher rates. With this said, a calculated approach may be considered to position yourself to take advantage of lower rates as they fall.

According to the Central Bank of Canada, it could take until summer 2024 for inflation to settle below 3%, and until 2026 for the prime interest rate to drop to its ‘neutral rate’. In other words, there will not likely be a sharp drop in Central Bank rates but a gradual drop over 2 years.

A Fixed Mortgage Rate Strategy to Reduce Interest Rate Risk

The traditional thinking is that a 5-year rate is a safer bet, and is the main ‘go to’ rate presented by many Bankers and Mortgage Brokrs.

However, from the ‘rate drop’ perspective analyzed above, if you lock in a higher rate for too long, you risk paying too much.

Therefore, a shorter fixed rate term, such as a 1-3 year fixed rate, could help position you for lower rates in 2024-2026, assuming the economy weakens.

A 3 year fixed rate, is a more careful approach and could position you better to renew into a substantially lower fixed rate, perhaps up to 1.5% lower, in 3 years’ time. For example, if your rate today is locked in around 5%, you would not see further upside on your rate for the next 3 years. This zero upside potential for 3 years comes with the peace of mind many Canadians are looking for with a fixed rate. Also, the 3 year fixed rate may be broken in the last year of the term, potentially with a lower penalty if rates fall sooner.

A 1-2 year fixed rate can also make sense. It is likely that within 1 year, fixed rates will be lower. Fixed rates typically drop well ahead of the Bank of Canada driven variable rate, so a mortgage term renewing in 1 year could lead to a lower mortgage renewal rate, even if the Central Bank has not dropped rates yet or has just begun to. However, 1 year does not leave much room for error. There could be a resurgence in inflation or some other unknown event that keeps rates higher for longer. Additionally, the 1 year fixed is the highest % rate in 2024. So, this adds to the risk of paying too much. Finally, if the variable rate is equivalent to a 1-2 year fixed rate, and variable is projected to fall within 6 months, this negates the benefit of short term fixed rates because you may be better off with variable.

A 2 year fixed rate is slightly lower than the 1 year and provides more time to allow rates to drop.

What about a 5 Year Fixed Rate?

As of May 2024, there is some concern that central bank rates will be higher for longer, especially if there is a major global economic or political issue. Or if there is a housing market correction, banks may price in substantially more losses and risk into mortgage rates. Although the financial market data does not currently support this view, it doesn’t mean higher rates can’t persist. So, for added comfort, it can be worth considering a 5 year fixed rate mortgage.

Additionally, 5 year fixed rates are currently about 0.20% lower than a 3 year fixed rate and well over 1% lower than a 1-2 year fixed rate. So this lower rate moderates the risk of the 5 year fixed rate mortgage.

Indeed as some (mainly insured or insurable) 5 year fixed mortgage rates approach the mid 4% range, locking in a rate for 5 years is becoming an interesting proposition. If mortgage rates stabilize in the mid – high 3% range in 2026, a mid 4% range mortgage rate would not be too far off, and would have provided a lower rate savings benefit for a good portion of the 5 year term, versus higher rate short term or variable rates.

For those looking for the lowest rates today, and are comfortable if rates are, for example, 1% lower 2-3 years into their term, then a 5 year fixed rate in the mid-high 4% range is worth considering.

A Variable Rate Strategy to Reduce Interest Rate Risk

For those with a higher tolerance for risk, a variable rate is worth considering.

As soon as the rate begins to fall, perhaps in mid-late 2024, the variable rate holder will benefit immediately. This ‘lower rate sooner’ potential could lead to more savings than locking in a shorter term, 2-3 year fixed rate.

Given over 40 years of historical rate data, as seen in a York University study on Canadian interest rates, the variable rate could lead to more significant savings over the long term.

There is certainly the potential for more savings with the variable rate, especially if rates fall sooner than expected. Still, with the potential for variable rates to remain higher for longer, with only ~1.25% of cuts projected over the next year, it will take a bit of a thicker skin in mid 2024 to realize these savings over the next 5 years.

Connect with Altrua Financial to see what strategy may be right for you, or check out our other articles on the subject just below:

Variable Vs Fixed Mortgage Rate

Should I lock in my variable rate mortgage?