High housing costs and mortgage interest rates have dampened many Canadians’ dreams of owning a home someday, but things are slowly changing.
The Bank of Canada (BoC) has been dramatically reducing its key interest rate for the past year, and more cuts are expected soon. In addition, the government has introduced a few measures to make home affordability a little more realistic.
The most recent of these measures took effect on Sunday when Ottawa raised the price cap for insured mortgages from $1 million to $1.5 million. This cap had not been adjusted since 2012. The move aims to help more Canadians qualify for a mortgage with a downpayment below 20%.
Another step introduced the same day is expanded eligibility for 30-year amortization for first-time homebuyers and Canadians purchasing new builds.
Last month, Canada also ended the requirement of stress tests on insured mortgaged switches.
So, what’s in store for 2025?
“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,” observes Penelope Graham, a mortgage expert at Ratehub.ca. “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.”
Despite everything, the outlook for borrowers isn’t all negative. Silver linings are waiting in the new year. Graham shared her mortgage and housing trends predictions for the coming year with Daily Hive.
Variable vs. fixed rates
Graham and other experts believe that with more BoC rate cuts coming, 2025 will be a comeback year for variable-rate demand. Another 50-75 basis point rate reduction could come in the next six months.
“That would bring the overnight lending rate to a range between 2.5 to 2.75%, and the best variable mortgage rates will, in turn, fall to the mid to upper 3% range. Fixed mortgage rates, meanwhile, appear to be nearing their floor as bond investors hold firm in the face of economic uncertainty, including a potential trade war in the first half of the year,” she shared in an email.
More short-term borrowing
Borrowers are less likely to lock in rates for the long term because five-year rates seem to be stagnating.
“Options such as two- and three-year fixed terms offer the best of both worlds, offering shelter from short-term volatility, and the flexibility to make a change to their mortgage term sooner, without taking on the risks associated with a variable-rate mortgage,” Graham noted.
Rate pricing battle incoming
Around 1.2 million fixed-rate mortgage holders are due to renew this year, meaning lenders will compete to attract borrowers who want to switch.
“As the stress test requirement has been relaxed for many renewing borrowers, it’ll be easier than ever to change to a new bank at renewal time if they’re offering a better deal,” stated Graham. “As mortgages are considered ‘anchor’ products, it will be worth it for lenders to get aggressive with both their purchase and renewal rate pricing.”
More homebuying activity
“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,” Graham wrote in a blog post.
“Steadily lowering mortgage rates, combined with the implementation of new mortgage amortization and down payment policies, will continue to drive renewed home buying activity throughout the first half of 2025.”
Less shocking mortgage renewal
Graham noted that lower mortgage rates have considerably reduced the potential payment shock for borrowers whose mortgages are due to renew this year — particularly borrowers who got their rates very low during the peak first years of the pandemic.
“Mortgage delinquencies in Canada remain low, and our brokerage experience suggests that affected borrowers are simply more incentivized to shop for the best rate rather than default outright on their mortgage.”
Graham believes Canadian mortgage shoppers will enjoy “some of the most accommodative borrowing conditions seen in a long time” next year.
“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.”