Highlights

• Canadian mortgage rates have remained steady amidst a volatile bond market, but are expected to fall over the next three months.
• Economic slowdown is being driven by lower exports and business investment due to tariffs.
• The Bank of Canada cut its key interest rate for the first time since January, and we expect an additional rate cut this fall.

Mortgage Rate Outlook

The steady rise in Canadian and US bond yields that resulted from the somewhat haphazard rollout of US global tariff policy was halted in early August as markets digested the implications of weakening labour markets. Despite inflation still running hot in the United States, the focus of global financial markets has seemingly shifted to concerns about growth prospects in both the Canadian and American economies, particularly following very weak August employment data. Now with both the Bank of Canada and the US Federal Reserve easing policy rates, the Canadian five-year bond yield has fallen to its lowest level in several months.

Fixed mortgage rates had been drifting higher through the summer, following the rise in global bond yields. However, the abrupt decline in the five-year bond yield following weak August jobs data should translate to fixed rates reversing course. We expect the average uninsured five-year fixed mortgage rate offered by Canadian lenders will come down to around 4.35% by the end of the year.

Variable mortgage rates have moved in close alignment with fixed rates for much of 2025 as the Bank of Canada diligently held the overnight rate while observing the impacts of rapidly evolving trade policy. However, a further rate cut later in the year would pull variable rates closer to 4%.

Economic Outlook

The Canadian economy contracted in the second quarter of 2025 by 1.6%, close to the Bank of Canada’s forecast of a 1.5% slowdown. As expected, tariffs and their associated uncertainty drove sharp declines in Canadian exports along with lower business investment.

The economy is expected to rebound modestly in the third quarter on the back of stabilized (but lower) trade and continued growth in household spending. However, lingering uncertainties are expected to weigh on business investment, which, coupled with lower population growth, will continue to hinder growth prospects. We anticipate the Canadian economy will eke out meagre growth of about 1.3% this year before moderately improving through 2026.

Along with weaker-than-expected economic growth, tariffs continue to hamper business decisions as reflected by a deteriorating Canadian labour market. The economy lost 106,000 jobs from June to August and the unemployment rate has risen to 7.1%, a level not seen since May 2016 outside of the pandemic.

Thankfully, both the Canadian and American governments have signalled a potential de-escalation of tariffs with hopes of eventually renegotiating their current free trade agreement. Should an ultimate trade resolution be found, we expect the Canadian labour market and broader economy to recover as businesses and households find clarity in the overall outlook moving forward.

Bank of Canada Outlook

The Bank of Canada’s recent 25-basis-point cut to its overnight rate – from 2.75% to 2.5% – signalled a shift in focus towards stimulating the economy after weaker-than-expected second quarter growth. Fears that Canadian retaliatory tariffs would drive inflation higher have not come to pass, and may now be moot as Canada drops most of the retaliatory tariffs put in place earlier this year. As a result, the Bank now has the freedom to address a weakening Canadian economy free of worry about inflation spiralling higher.

Indeed, with core inflation losing momentum in recent months, the Bank appears reassured that it can support the economy through rate-cuts without risking an acceleration of inflation, especially considering the de-escalatory rhetoric coming from Ottawa regarding trade with the US. Taken together with weakening employment data, we expect the Bank to lower its overnight rate once more in 2025 in hopes of improving Canada’s labour and growth prospects through the fall.

While we forecast the Bank will lower its policy rate to 2.25% this year, the bottom end of what it considers neutral for the economy, risks to the economy from uncertainty and a deteriorating outlook could require deeper rate cuts. Canada has thus far avoided the worst-case tariff scenario previously envisioned, but tariffs have not gone away either as a cudgel for our largest trading partner to threaten us with or as a factor in slowing down global trade.

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Mortgage Rate Forecast by Brendon Ogmundson | Chief Economist | BCREA