The year 2025 is shaping up to be a pivotal one for Canada’s economy. With inflation cooling, unemployment stabilizing, and interest rates potentially declining further, many Canadians are cautiously optimistic about what lies ahead. As a mortgage broker operating in Ontario, I am not an economist—but my work depends heavily on understanding economic trends and how they influence mortgages and housing markets. In this article, I’ll provide a summary of current predictions and what they could mean for Canadians navigating real estate and borrowing decisions this year.
The Road to Lower Inflation
After a turbulent period of high inflation that peaked in 2022, Canada has made significant strides in bringing price growth back under control. The Bank of Canada’s (BoC) target for inflation is 2%, with a target range of 1-3%. Beginning of the year saw inflation decrease below the upper threshold of 3% and mid way through the year, inflation eased to the target rate of 2%. 2024 finished out the year at 1.8%, below the 2% target. Analysts predict inflation will generally stay around the same for 2025, barring major disruptions like geopolitical shocks or new trade barriers (more on that later).
Why does this matter? Inflation has a direct impact on interest rates. The BoC raised rates aggressively in previous years to combat inflation, but as price pressures ease, the central bank now has room to shift its focus toward supporting economic growth. This pivot is expected to result in further interest rate cuts, providing relief to borrowers and potentially stimulating housing activity.
Employment Trends: Stability with Risks
Canada’s labor market has been remarkably resilient, with unemployment rates returning to pre-pandemic levels in many regions. Economists often reference a range of 5% to 5.5% as Canada’s “natural rate of unemployment,” where inflation remains stable without causing undue economic strain. As of December 2024, the unemployment rate in Canada stood at 6.7%, slightly above this natural range. This indicates some economic slack, which could influence the BoC’s policy decisions moving forward.
Proposed U.S. tariffs on Canadian goods could weigh on export-driven industries, potentially leading to job losses in affected sectors. Businesses remain cautiously optimistic about sales growth in 2025 but are hesitant to expand their workforce significantly given these looming risks.
Stable employment is crucial for maintaining consumer confidence and supporting the housing market. While modest increases in unemployment could occur if economic growth slows, rate cuts by the BoC could help mitigate these effects by lowering borrowing costs for businesses and individuals alike.
What’s Next for Interest Rates?
The BoC’s overnight rate—currently at 3.25%—is widely expected to decline over the course of 2025. Canadian Mortgage Trends predicts that it is likely to settle between 2.00% and 3.00%, depending on the trajectory of inflation and economic conditions (Canadian Mortgage Trends, December 30, 2024). Typically, when the BoC reduces their overnight rate, the banks in turn lower their prime rate. This would result in prime rates settling between 4.20% and 5.20%.
According to the chart listed, CIBC, National Bank, and TD Bank all predict the overnight rate to be 2.25% by the end of Q4 2025. RBC has an aggressive prediction of 2.00% while Scotiabank has been conservative at 3.00%. BMO is in the middle at 2.5%. These numbers were updated as of January 27th (Canadian Mortgage Trends, Bank of Canada Rate Forecasts). You can refer to this article for continued updates throughout the year.
Morningstar Canada also predicts that the rate could fall to 2.25% by year-end, marking a full percentage point reduction from today’s level (Morningstar Canada, December 31, 2024). These cuts would likely result in lower prime rates, benefiting Canadians with variable-rate mortgages or those looking to take on new debt.
Bond yields—a significant factor influencing fixed mortgage rates—are anticipated to remain relatively stable with a slight potential for decline, driven by easing inflation expectations and central banks adopting more accommodative monetary policies
Fixed mortgage rates could become more competitive, though their adjustment may lag behind variable rates.
Variable vs. Fixed: Why Variable Rates Could Shine
For borrowers, the anticipated drop in the prime rate makes variable-rate mortgages particularly appealing. If the BoC follows through with another 1% reduction, homeowners with variable rates could see significant savings compared to those locked into fixed-rate mortgages at current levels. While fixed rates offer the security of predictable payments, variable rates’ flexibility may provide greater financial advantages in a declining rate environment.
Of course, choosing between fixed and variable depends on individual circumstances, including risk tolerance and long-term financial goals. Consulting with a mortgage broker, like myself, is essential to determine which option aligns best with your needs.
Navigating the U.S.-Canada Dynamic
The economic relationship between Canada and the United States adds another layer of complexity to interest rate predictions. While the BoC is easing, the U.S. Federal Reserve remains focused on combating inflation and is likely to maintain higher interest rates in 2025. This divergence could lead to a weaker Canadian dollar, making imports more expensive and potentially reigniting inflationary pressures domestically.
Moreover, proposed U.S. tariffs on Canadian goods present a new risk. These tariffs could dampen economic growth and complicate the BoC’s efforts to stimulate the economy. As highlighted in a recent Reuters article, trade uncertainties underscore how quickly the economic outlook can shift (Reuters, January 27, 2025).
The Housing Market in 2025
Canada’s real estate market remains a hot topic, with predictions for 2025 reflecting cautious optimism. According to Canadian Mortgage Trends, home prices are expected to rise modestly, supported by population growth and improving affordability due to lower interest rates (Canadian Mortgage Trends, December 2024).
However, regional variations will likely persist. Smaller markets may experience stronger growth as buyers seek more affordable options outside major urban centers. Meanwhile, supply shortages in cities like Toronto and Vancouver could keep upward pressure on prices despite softer demand.
What This Means for Borrowers
For prospective homebuyers and current homeowners, the economic trends of 2025 offer both opportunities and challenges. Falling interest rates could make mortgages more affordable, whether you’re looking to purchase your first home, upgrade, or refinance. At the same time, uncertainty around trade and global economic conditions highlights the importance of staying flexible and informed.
As a mortgage broker, my role is to help you navigate these complexities and make decisions that align with your financial goals. Whether you’re considering a variable-rate mortgage, exploring fixed-rate options, or simply looking for advice, I’m here to provide the guidance you need.
Final Thoughts
While 2025 holds promise for lower borrowing costs and a stable housing market, it’s essential to remain vigilant. Predictions are subject to change, and external factors—from U.S. trade policies to global economic shifts—could alter the landscape quickly. Staying informed and working with a trusted mortgage professional can help you adapt to whatever the year brings.
If you’re considering a new mortgage or want to review your current options, don’t hesitate to reach out. Let’s discuss how these trends might impact your financial plans and find the best strategy for your needs.
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