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December 2024: Mortgage market update

The housing market in Canada has seen a rather quiet year so far, as buyers are staying on the sidelines in anticipation of lower rates. With the Bank of Canada having implemented its fifth policy rate cut in 2024 and further cuts broadly expected, home sales have finally started to pick up.  

Variable mortgage rates have fallen in proportion to the Bank of Canada’s 50-points December rate cut, and, with more rate cuts anticipated in 2025, further downward pressure on rates is on the horizon. Fixed rates are tied to bond yields, which have tumbled in the wake of the Bank of Canada’s rate cuts. As a result, fixed mortgage rates have decreased slightly as well. 

Overall, though, when looked at from a historical perspective, both fixed and variable mortgage rates are currently elevated. Anyone shopping for a mortgage rate in Canada today should be aware of the economic factors below.

• Real estate update: In the latest market data for November 2024, the Canadian Real Estate Association (CREA) reported a dramatic rebound in the housing market. A total of 37,855 houses were sold, marking a 26% increase compared to November 2023. This marks the third straight month of rising sales, driven by lower interest rates. Rising demand is beginning to put upward pressure on home prices. The national average home price rose 7.4% year-over-year to $649,411, with a 0.9% monthly increase. The National Composite MLS Home Price Index (HPI), which provides a more stable price measure by removing extremes, also climbed 0.6% from October, its largest monthly jump in over a year. While new listings increased slightly by 2.4% year-over-year to 56,242 homes, they fell 0.5% compared to October, tightening inventory further. The sales-to-new-listings ratio (SNLR) increased to 59.2%, nearing the seller’s market territory. CREA defines a balanced market as having an SNLR between 45% and 65%, with ratios above 65% indicating a seller’s market and below 45% a buyer’s market. Inventory levels dropped to just 3.7 months — the lowest in 14 months and well below the long-term average of 5.1 months. With more rate cuts expected in 2025, alongside new mortgage rules and stabilized inflation, experts anticipate a strong winter market and an exceptionally active spring selling season.

  Read more: National home sales rise 26% in November

• CPI update: Inflation in Canada edged down to 1.9% year-over-year in November, a slight decline from 2% in October, according to the latest Consumer Price Index (CPI) report from Statistics Canada. The slowdown reflects the continued impact of the Bank of Canada’s five consecutive rate cuts, which brought the benchmark interest rate to 3.25%. As a result, mortgage interest costs — a key inflation driver — declined for the 15th straight month, rising 13.2% compared to 14.7% in October. Shelter inflation eased to 4.6%, though rent prices remained high, rising 7.7% year-over-year. Food costs, another key pressure point for households, rose by 2.6%, showing only a slight improvement from October’s 2.7% but still reflecting a steep 19.6% increase compared to 2021 levels. Meanwhile, gas prices fell modestly by 0.5%, a slower pace than the 4% drop seen the month prior. Core inflation measures, which exclude volatile components, remained steady, with CPI Trim and CPI Median holding at 2.7% and 2.6%. This persistence highlights underlying price pressures that could complicate the Bank of Canada’s rate-cutting decisions in 2025, particularly as the U.S. Federal Reserve signals a slower pace of its own rate cuts. Analysts expect the BoC will proceed cautiously with smaller, gradual rate cuts into 2025.

  Read more: Canadian CPI falls to 1.9% in November

December 11, 2024 Bank of Canada announcement update

On December 11, 2024, the Bank of Canada (BoC) reduced its target for the Overnight Lending Rate by 0.5%, bringing it down to 3.25%. This marks the fifth consecutive rate cut since June 2024, with a total reduction of 175 basis points from the previous high of 5%. This is the second 50-basis-point cut in a row, following the October 2024 announcement.

• The decision was influenced by weaker-than-expected economic performance, with Canada’s GDP growth slowing to 1% in the third quarter and unemployment rising to 6.8% in November.
• The prime rate at most lenders will fall to 5.45%, resulting in lower monthly payments and reduced interest portions for borrowers with variable-rate mortgages and home equity lines of credit (HELOCs).
• Fixed mortgage rates, though not directly tied to the Bank’s rate, may experience reductions as five-year bond yields have already dropped to 2.8%. 
• For homeowners nearing mortgage renewal in 2025, the rate cut offers an opportunity to secure lower renewal rates. By securing a rate hold now, borrowers can lock in the lowest rate they qualify for, protecting themselves from potential future rate increases during the renewal process.
• The BoC signaled that it may take a slower pace with future rate cuts in 2025, as the policy rate is now significantly lower than in June 2024. Any further reductions will be assessed on a case-by-case basis.

What the November Fed rate cut means for Canadians

On November 7, 2024, the US Federal Reserve announced a quarter-point cut to its benchmark interest rate, marking its second consecutive reduction following a half-point cut in September. This decision aims to manage inflation, which has decreased from a peak of 9.1% in June 2022 to 2.4% in September.

The Fed’s future path for rate cuts has become less predictable, particularly in light of the recent US Federal Election. President Elect Donald Trump's economic proposals could potentially reignite inflation. He has also raised concerns about the Fed's independence in monetary policy decisions. 

The latest rate cut is compounded by rising bond yields in the US, notably following Trump's victory.  This trend extends to Canada, where the government of Canada's five-year bond yield recently rose above 3%, suggesting that fixed mortgage rates will increase, leading to higher borrowing costs for Canadian homeowners and potential buyers.

As both Canadian and US economies navigate potential volatility, borrowers are advised to prepare for fluctuating interest rates in the coming months. 

Also read: US Federal Reserve cuts rate by 0.25% in November announcement

Canadian mortgage reform update

On September 16, 2024, the federal government announced sweeping changes to mortgage qualification rules for first-time home buyers, as well as those purchasing newly-constructed homes.

As of December 15, 2024:

• 30-year amortizations will be available for all first-time home buyers, regardless of whether they have an insured mortgage. These extended amortizations are also available for any purchase of new construction.
  
  
• The maximum purchase price for an insured mortgage (where less than 20% down is paid) will be increased to $1.5 million, from the current $1 million.
  

These are some of the most impactful mortgage reforms announced since 2012, and are anticipated to increase first-time home buyers’ affordability and access to the housing market. 

Learn more about these new mortgage rule changes on the Ratehub.ca blog

5-year variable mortgage rates: Quick facts

• Variable mortgage rates fluctuate with the prime lending rate.
• Variable rates are typically stated as "prime plus or minus a percentage".
• Some 5.36% of all mortgage requests made to Ratehub.ca from January - December 2023 were for 5-year variable-rate mortgages.
• 5-year fixed mortgage rates are driven by 5-year government bond yields.
• 23% of consumers opted for a variable-rate mortgage in 2024, down from 27% in 2023. (Source: 2024 CMHC Mortgage Consumer Survey)

Historical 5-year variable mortgage rates

Checking historical mortgage rates is a great way to properly understand which mortgage terms attract lower rates and whether rates are especially high or low at any given moment. Here are the lowest 5-year variable rates of the year in Canada for the last several years, compared to several other types of mortgage rates.

Source: Ratehub Historical Rate Chart

The popularity of 5-year variable mortgage rates

Although fixed-rate mortgages are more popular, according to Mortgage Professionals Canada, 25% of Canadian mortgage-holders had variable-rate mortgages at the end of 2022, making it the second most popular type of mortgage.

Historically, fixed rates are generally more popular, however, in the wake of the COVID-19 pandemic, the Bank of Canada cut its target overnight lending rate in March 2020, which caused the prime rate to go down. As a result, variable-rate mortgages experienced a surge in popularity; as mentioned above, roughly 25% of all mortgages in Canada at the end of 2022 were variable-rate mortgages, in contrast to 20% in 2019. However, as variable-rate mortgages have climbed to rates significantly higher than fixed-rate mortgages in the wake of multiple Bank of Canada rate hikes over the course of 2022, their popularity has waned considerably in 2023. While some 26% of all rate inquiries to Ratehub.ca in 2022 were for 5-year variable rates, they accounted for just 5.36% of all rate requests to Ratehub in 2023. Moreover, according to the 2024 CMHC Mortgage Consumer Survey, 23% of consumers opted for a variable-rate mortgage in 2024 (down from 27% in 2023). The table below, sourced from the same survey, shows the popularity of fixed-rate mortgages in 2024 among the four main categories of people who contracted mortgages.

A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.

What drives changes in 5-year variable mortgage rates?

As previously mentioned, the 5-year variable mortgage rate will fluctuate with any movements in the prime lending rate, which is the rate at which banks lend to their best and most credit-worthy customers. The variable mortgage rate is typically stated as prime plus/minus a percentage discount/premium.

Canada’s prime rate is influenced primarily by economic conditions. The Bank of Canada adjusts it depending on the state of the economy, determined by various factors in employment, manufacturing, and exports. Together, these shape the inflation rate. When inflation is high, the Bank of Canada must act to avert an over-stimulated economy. They will increase the prime rate to make the act of borrowing money more expensive.

Conversely, in cases where inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing. The discount/premium on the prime rate applied to the variable mortgage rate is set by the banks, based on their rate strategy and desired market share. 

The bottom line: Should you get a 5-year variable rate?

As long as you're comfortable with risk and understand that variable rates can fluctuate throughout your term, then a 5-year variable rate is a reasonable choice. Since variable rates do have the inherent risk of rate increases, make sure you have enough money in your budget to cover a higher mortgage payment if rates increase.

If you're still not sure about what mortgage product is right for you, it's a good idea to speak to a mortgage broker. Consultations are free, and you'll leave with expert advice, personalized to you.

For more information, check out these helpful pages! 

• Best Mortgage Rates in Canada
• 5-Year Fixed Mortgage Rates
• Variable or Fixed Mortgage Rates
• Amortization
• Mortgage Term vs. Amortization
• Is a 5-Year Fixed-Rate Mortgage Term Right For You?
• Porting and Assuming Your Mortgage