Canadian Interest Rate Forecast to 2025

Updated April 11, 2024

HIGHLIGHTS

• Five-year government bond rates have risen from 0.3 per cent to over 3 per cent since January 2021. This has had a knock-on effect on mortgage rates.

• Since 2022, The Bank of Canada (BoC) has raised its policy overnight rate from 0.25% to 5.00% to combat high inflation. The most recent increase was July 12th; the rate has remained unchanged up until now. The next announcement is June 5th.

• The Bank remains concerned about persistent inflation. The Bank of Canada’s Governing Council agreed they are prepared to raise the policy rate further if inflationary pressures do not ease to a range of +/-2% at the expected pace.

• Currently, the Bank of Canada expects inflation to ease gradually and return to the 2% target by 2025, which implies rates will remain elevated until 2025.

There are concerns about inflation, which peaked at 8% in June 2021 and is currently around 2.8%. “Core” or “Trim” inflation is 3.2%. Inflation erodes the value of savings and incomes. The Bank of Canada targets a sustained inflation rate range between 3 and 1 per cent and an average of 2 per cent.

At its last announcement on April 10th, Bank of Canada (BoC) Governor Tiff Macklem said a June 5th rate cut is “within the realm of possibilities.” He added to this saying, “I think we’ve been pretty clear, we are encouraged by what we’ve seen since January. If you look at our indicators, they're not all progressing at the same speed, but they've all been moving in the right direction: inflation has come down, core inflation has come down, the more timely three month measures of core inflation suggests there's downward momentum.” He then said that the Bank still needs to see continued progress on all of these fronts before it becomes “appropriate” to reduce the rate.

Based on the current trends, it seems unlikely that by June 5th, inflation will be safely within the target range long enough to ease the Bank’s concerns.

While low rates were intended to help borrowers weather the economic fallout of the pandemic, they also appeared to fuel a real estate boom and potentially a housing bubble. Asset bubbles in real estate and other assets put pressure on the BoC and federal and provincial governments. The government must dial down the stimulus, and the Bank of Canada has increased rates to a level that should cool the economy and reduce price pressures.

Low mortgage rates correlate with real estate price growth, and rising rates coincide with price cooling or corrections.

This article will forecast the variable (floating) and 5-year fixed (locked-in) rates. Keep reading to learn what the big banks are saying about rates.

THE CURRENT SITUATION

High Mortgage Rates

Fixed rates have risen significantly from the pandemic-induced record lows. While they have dropped slightly in the last six months, they are not expected to fall significantly. The average forecast sees the 5-year fixed mortgage rate dropping another half a percentage point by the end of 2025. The most optimistic estimate is a drop of 1.5 per cent to 4.6 per cent.

Higher mortgage rates significantly reduce homebuying budgets.

The impact of early rate increases on homebuying budgets was more significant than the subsequent increases. However, it can take up to 18 months for the effect of the rate increases to be felt in the housing market.

Prospective homebuyers can take advantage of this effect by getting a pre-approved mortgage four months before making a purchase. By the time they find a place they like, rates may have risen, and competing bidders who didn’t get a pre-approved committed rate might be saddled with smaller homebuying budgets.

If your bank doesn’t offer a 4-month rate guarantee with their pre-approval, talk to a mortgage broker who can find you a lender with more flexible terms.

MORTGAGE RATE FORECASTS

Should I Lock in a 5-year Fixed Rate?

Banks charge extra interest for the privilege of borrowing at a fixed rate. Usually, they charge more the longer the rate is locked in. Is it worth paying extra for their fixed-rate service?

Locking in a 5-year fixed mortgage rate will only benefit you financially if variable rates continue to climb. Variable rates are at a historical high and are unlikely to rise much more. However, variable rates are presently higher than fixed rates.

If a borrower agreed to a fixed rate three-year term, they would get a lower rate than the current variable rate, and in three years, when the mortgage comes due for renewal, mortgage rates are likely to be much lower.

I have a variable rate today. Should I lock in now or wait?

Most variable-rate mortgages allow you to lock in anytime. Should you? If you want the security of a locked-in rate, locking in now seems prudent. Fixed rates have been rising and are expected to rise further because the Bank of Canada is in the process of “Quantitative Tightening”.

What is quantitative tightening (QT)?

QT is where the Bank of Canada sells government bonds and other assets to increase the long-term bond, mortgage, and deposit rates.

Fixed-rates Provide Peace of Mind

If the risk of rising rates worries you, then you should consider a fixed-rate mortgage rate term. Locking in your rate provides peace of mind, but it does come with some risks that many people aren’t aware of.

Fixed-rates Have Higher Cancellation Penalties

Suppose you are planning to sell or move in the next few years. In that case, cancelling a fixed-rate mortgage before completing the full term can result in a significant penalty fee.

Shall I Get A Variable Rate Mortgage?

Variable rates are typically a little lower than fixed rates because the borrower takes on the risk of rates changing over time.

However, because there are expectations of lower rates in the future, currently, variable rates are significantly higher compared to the long-term rates.

Variable rates are expected to remain above 6 per cent well into 2024. That's high. As well, recently economists have been continually revising their forecasts upward. There's a lot of uncertainty about the future of interest rates. Currently, a fixed 3-year or 5-year mortgage is likely the most prudent choice.

HOW FORECASTS WORK

Forecasts are built on assumptions, so different assumptions about what will happen naturally lead to different forecast results. That is why Mortgage Sandbox publishes the range of projections and the average of all the forecasted rates.

Apart from the economic assumptions, there is also guidance from the Bank of Canada. The Bank interferes in markets to push rates below the level that the free market would set. Often, Bank guidance is more important than the economic fundamentals when it comes to movements in policy interest rates.

Forecast Assumptions

Rising Mortgage Rates

The Bank of Canada projects that inflation will not reach a consistent 2% until sometime in 2024. They believe the current run-up in inflation is due to supply-chain constraints and is not a long-term systemic issue.

The Bank Rate is significantly higher than what would be considered a neutral range of 2 to 3 per cent. If inflation is brought down and there is no recession, the rate will return to a neutral range. If there is a recession, it will fall further, but it is improbable we will see pandemic-like low rates again in our lifetimes.

If inflation and house prices continue to rise, then the Bank of Canada could raise rates again.

Read: Why is the Bank of Canada increasing your borrowing costs?

Forecast Foundations

Fixed-Rate Mortgage

The foundation for a 5-year fixed-rate mortgage forecast is the five-year government of Canada bond, and the government is considered a riskless borrower.

Mortgage loans are considered low-risk but riskier than loans to the government. So, the average Canadian has to pay 1.5 to 2 per cent more on a mortgage than the government pays to borrow money. The spread or gap between the government borrowing rate and another loan rate is called a ‘risk premium.’

Bond rates are currently rising, so if the risk premium remains unchanged, we should expect mortgage rates to begin to rise. If the economy enters a recession, the risk premium might increase, which would put upward pressure on mortgage rates.

Variable-Rate Mortgage

The basis for a variable-rate mortgage forecast is the Bank of Canada's target rate.

The average Canadian also pays a risk premium above the BoC target rate when getting a variable-rate mortgage. The target and variable mortgage rates don’t move in perfect synchronisation but usually trend together.

Sources

To develop our analysis, we’ve surveyed the most prominent Canadian banks and their forecasts.

• BMO Bank of Montreal

• C1 Central1

• CIBC

• Desjardins

• National Bank of Canada

• RBC Royal Bank

• Scotiabank

• TD Canada Trust

KEY TAKEAWAYS

We suggest contacting a Mortgage Broker as early as possible to lock in a rate. You can lock in your mortgage rate up to 120 days before closing on a home purchase or your mortgage renewal.

Here’s our mortgage renewal guide that will help you navigate the process.

Is it a better time to Buy or Sell a home?

More economic factors are on balance, putting downward pressure on home prices than upward pressure. However, the same could have been said during the pandemic. Markets do not always follow the logic of economic fundamentals.

Homebuyer Advice

If you plan to buy in the next three years, be mindful that there is a risk that prices will fall in the short run, so prepare yourself for that possibility. Falling prices make it more challenging to secure financing, particularly if the purchase completion date is a few months in the future.

The rising mortgage rates provide less purchasing power for buyers than six months ago.

Home Seller Advice

If you were planning to sell, it may be worthwhile selling sooner. Although the pandemic caused record-breaking market conditions, the market is cooling in most Canadian cities, and there is a lot of uncertainty surrounding when conditions will improve. Selling now, you should get a price slightly off the peak. If you wait until a trough and recovery, then you might have to wait a few years.

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