Mortgage Rate Outlook

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Highlights

• Canadian fixed mortgage rates are holding steady amidst bond volatility.
• Trade uncertainty continues to be a drag on economic growth.
• After two rounds of rate cuts, is the Bank of Canada done?

Mortgage Rate Outlook
Bond markets in Canada and the United States are coming to terms with monetary policy that may be tighter than previously expected. Even after two rounds of rate cuts by the Bank of Canada, five-year bond yields have actually risen in recent weeks due to both forward guidance by the Bank – implying that this rate-cutting cycle is over – and messaging from the US Federal Reserve that a December rate cut is far from certain. The Bank of Canada’s current stance appears to be that with core inflation holding above its 2 per cent target, economic growth would need to underperform an already weak forecast for the policy rate to fall lower than its current level.

Fixed mortgage rates have remained steady through the past few months despite bond volatility in either direction. Spreads between the five-year fixed rate and bond yield were roughly 40 basis points higher than historical averages but have started to converge to normal levels as bond yields tick higher. That said, there is still some room for uninsured fixed rates to fall from their current level of 4.5 per cent to a range of 4.3 to 4.4 per cent by the end of the year.

Variable mortgage rates have moved lower with the Bank of Canada cutting its overnight rate. The average variable rate being offered by Canadian lenders is currently at about 4.1 per cent, or only 30 basis points below the Prime Business Rate. Some lenders could get more aggressive with their discounts on variable rates, but without further Bank of Canada rate cuts, the variable rate should remain near 4.1 per cent over the next year.

Economic Outlook 
The Canadian economy expanded by 2.6 per cent on an annualized basis in the third quarter of 2025, materially outpacing the Bank of Canada’s forecast of 0.5 per cent growth. Outperformance was largely attributable to anomalous defence spending from the government, with room for significant revisions due to the US government shutdown impacting trade data. However, soft export volumes and business investment are largely a byproduct of trade uncertainty, which is also beginning to temper household spending.

Lingering uncertainties from tariffs and evolving immigration policies are hampering Canadian businesses from growing through expanding employment or investment. Such conditions are reflected in the Canadian labour market, which is characterized by minimal net job growth in recent months and an elevated unemployment rate.

After several months of de-escalatory rhetoric from the Canadian and American governments, both sides appear at odds with each other once again, demonstrating that uncertainty will continue to linger in the short to medium term. Ultimately, the Canadian economy and labour market rely on a final trade resolution with the US, which, if signed, would drive a strong rebound in overall activity, especially if tariffs are removed altogether.

Nonetheless, a seemingly permanent shift in trade policy with the US dampens the outlook for investment and exports. Taken together with declining population growth, the national economy remains limited in avenues for growth. In this environment, we expect slow but positive growth to continue in the fourth quarter through more diversified (albeit weak) trade and resilient consumption, with the Canadian economy scraping its way to 1 per cent growth this year before an uptick in 2026 to 1.5 per cent growth in real GDP.

Bank of Canada Outlook
Fresh off two consecutive rate cuts, which brought the overnight rate to 2.25 per cent, the Bank of Canada shifted focus towards addressing the downside risks of tariffs on the labour market and broader economy. Nonetheless, the Bank continues to signal that its policy measures cannot offset the economic impacts of trade wars. While concerns over tariff driven spikes in prices are less of a concern, the underlying trend in inflation remains above the Bank’s 2 per cent target, leaving policymakers somewhat constrained with respect to future rate decisions.

The Bank’s updated economic outlook for growth is rather bleak, and yet forward guidance suggests that the economy would have to drastically underperform or even contract for it to further lower the overnight rate. Monetary policy limitations are also driven by core inflation, which has stabilized at roughly 2.5 per cent, moderately higher than what the Bank would like in order to cut below neutral. Taken together, the likelihood of another cut to the overnight rate before the end of the year is low.

Even though the Canadian economy seems to have avoided the worst-case scenario for the impact of tariffs, the complexities of global trade tensions still mean at least some downward pressure on growth coupled with potential upward pressure on inflation. That puts the Bank in a difficult spot, and unsurprisingly, policymakers are acting with enhanced levels of caution.

That cautious stance is likely to be tested in the coming months, with lingering uncertainty over tariffs and the ever-present potential for new flare-ups over trade and other disputes. Ultimately, there is a strong probability that the Bank will eventually have to lower its overnight rate in response to weaker-than-expected growth over the next year, though our baseline is for the Bank to remain on hold at least through the first quarter of 2026.