Ratehub.ca’s 2025 mortgage predictions

Canadian consumers – and mortgage borrowers in particular – have been put through the ringer in recent years, as pandemic restrictions, soaring inflation, and skyrocketing rates all made their mark on the economy. This year ushered in some much-needed relief, as the Bank of Canada kicked off a (very) long-awaited rate cutting cycle, inflation started to normalize, and pandemic supply chain challenges faded further.

But borrowers can’t exhale just yet; 2025 looks to be another wild economic ride. A second Trump presidential term – and potential trade war – has injected uncertainty into any forward-looking analysis, with deep implications for our central bank. Simply put, the only constant Canadians can count on this year is upheaval – but there are a few mortgage trends shaping up from the ether.

Let’s take a look at what mortgage borrowers may be able to expect over the coming year.

Prediction 1: Variable mortgage rates will fall back below fixed

From a historical perspective, variable mortgage rates are always cheaper than fixed, but that’s been reversed since the early days of the pandemic. In March 2020, the Bank of Canada (BoC) made three emergency rate cuts to its benchmark interest rate, which is in turn used to set prime and variable mortgage rates, to a record low of 0.25%.

That drove unprecedented demand for variable-rate mortgages between 2020 and early 2022 – but that dried up in a flash once inflation spiked, and the BoC was forced to hike its rate an unprecedented 10 times between March 2022 and July 2023. According to the Fall 2024 Residential Mortgage Industry Report from the Canada Mortgage and Housing Corporation (CMHC), the uptake for variable rates plunged from 29% in October 2022, to just 9% by July of this year, following the end of this aggressive hiking era.

But 2025 is undoubtedly a comeback year for variable rates, now that the Bank of Canada is well into a fresh cutting cycle; the central bank has slashed its benchmark borrowing rate by a cumulative 175 basis points since June, from its high of 5% to 3.25% today. As a result, the best five-year variable rates in Canada have eased from around 5.7 to 4.35%. Given the central bank is expected to make several more cuts in 2025 (most economist forecasts call for an end range of 2.5 - 2.75%), that could result in a five-year variable rate around 3.6% by mid next year.

Fixed mortgage rates, on the other hand, appear to be reaching their floor. After what has been a volatile year for the bond market, the five-year government of Canada yield (which underpins pricing for five-year fixed yields) has bounced between the upper 2 to lower 3% range since the end of August. This indicates that markets have already priced in anticipated Bank of Canada rate cuts. Yields are also holding firm as doubts arise over whether the US Federal Reserve will indeed cut its own rate as aggressively as once expected. While it just delivered a 0.25% decrease on December 18th, sticky American inflation and economic uncertainty around a second Trump term will prevent yields from falling much further, and keep fixed rates firmly in their current range of around 4%; at least until we get more answers around American tariff threats.

Prediction 2: Borrowers will lock in for the shorter term

Five-year fixed mortgage rate terms are usually the most popular go-to among mortgage shoppers, but with rates poised to trend lower in the coming years, they’ve lost their lustre. No one wants to commit to a historically elevated rate when lower options could be just around the corner.

This has led to a boom in demand for shorter-term fixed-rate options, such as two- and three-year mortgages. Given the growing sentiment that five-year options are stuck where they are, shorter terms provide the best of both worlds. They offer borrowers some shelter from existing market volatility, and the ability to make a change to their mortgage years sooner, without taking on the risks associated with a variable. The latest CMHC data shows that, as of July 2024, fixed terms between three and five years accounted for 56% of all mortgages, compared to 22% in October 2022.

Prediction 3: The big banks will do battle on renewal rate pricing

Good news for those renewing their mortgages: 2025 is shaping up to be a very competitive year for renewal rate pricing. The CMHC reports that 1.2 million fixed-rate borrowers will be ending their terms this year, accounting for $300 billion in loans.  That’s a lot of business that banks will be keen to retain – or snap up, from borrowers looking to switch lenders for a better deal.

Following new mortgage policies that drop the stress test requirement for many borrowers making a straight switch at renewal, it’s easier than ever to seek out a better rate from a different lender if your current one isn’t offering you the best deal. And, given mortgages are considered “anchor” products – meaning clients are likely to have multiple other account types at the institution where they have their mortgage – it’s worth it for lenders to aggressively price their rates, and potentially undercut each other by a few basis points. The takeaway for borrowers: shopping around has never been more important.

Prediction 4: The real estate market is set to ramp up

After what was a largely stagnant year for purchases, home buying demand began picking up in the latter months of 2024, as the combined effects of rate cuts and new borrowing policies materially improved affordability.

According to the Canadian Real Estate Association, national home sales started to improve this autumn, with sales rising by 30% and 26% in October and November, respectively. This was largely due to lower mortgage rates taking hold, stated the association, which forecasts sales to rise 6.6% in 2025. Lower borrowing costs have also eased the stress test barrier for those buying a new home, which tacks 2% onto the mortgage contract rate they get from their bank.

New mortgage reforms, that allow 30-year amortizations for first-time and new construction buyers and easier down payment rules for insured mortgages, also went into effect on December 15. Not only will these new rules make it easier for first-time buyers to get into the market, but they’ll also drive demand for properties priced between $1 million and $1.5 million, as a 20% down payment is no longer required. This will especially boost demand in Canada’s priciest housing markets, such as Toronto and Vancouver.

Prediction 5: Renewers to face less payment shock

Much has been made about the impending “mortgage renewal wall”, the fear that millions of mortgage holders – who originally took their rates out at record lows between 2020 and 2022 – will be forced to renew at much higher rates, and see their monthly payments balloon. A report released by the Bank of Canada in December 2023 stated that:

“Since March 2022, interest rates have risen considerably and rapidly following a period of historical low rates during the first two years of the COVID‑19 pandemic. As a result, many mortgage holders are currently facing significantly higher payments, and others will do so at renewal. The exact size of this increase in payments depends on the features of each mortgage and how interest rates continue to evolve.”

Additional data from CMHC estimates that homeowners renewing this year could face a monthly mortgage payment increase of between 30 - 40%. 

The good news? Due to mortgage rate cuts, today’s renewal “wall” more resembles a speed bump – one that existing borrowers generally take in stride. Mortgage delinquencies in Canada, while rising slightly this year, still accounted for just 0.19% of all mortgages in the second quarter of this year, according to Equifax. Further analysis from TD Economics states that “things have gone better than expected” in regards to renewal payments, calling for the aggregate payment of mortgages outstanding in mid-2024 to drop by 1.2% in 2025, as opposed to initial forecasts that they would rise by 0.5%.

The bottom line: Better mortgage deals to be found in 2025

Economic uncertainty may pose challenges for central banks and bond investors in 2025 – but Canadian mortgage shoppers will enjoy some of the most accommodative borrowing conditions seen in a long time. With rates set to lower further, and lenders looking to scoop up market share, those looking for a new rate, or renewing their existing term are smart to explore their options – and make a change if their existing bank won’t step up to the pricing plate.

Also read:

• The state of mortgage renewals in Canada: Insights from the CMHC
• National home sales rise 26% in November due to rate cuts
• Insured vs. uninsured mortgages: What’s the difference?
• Bank of Canada rate cut leads to improved affordability in October