Welcome to the second edition of our Mortgage Newsletter for 2025!
The Bank of Canada (BoC) is still in a generous mood—keeping the season of giving alive with another 0.25% rate cut this morning. This brings the policy rate down to 2.75% from 3.00%, marking the seventh consecutive cut and lowering the Prime Rate to 4.95%—a full 2.25% drop since this rate-cutting cycle began.
If you’ve got a variable-rate mortgage or a loan tied to Prime, this means one thing: more money in your pocket (or at least, less going to the bank). Since June 2024, borrowers have seen their monthly interest costs drop by $187.50 for every $100K of debt—a continued relief.
But before we start celebrating like it’s 2020 (bad example?), let’s break down why the BoC is still cutting rates and what it means for your mortgage strategy.
🏦 What's Driving the drop in Prime Rate?
The BoC isn’t cutting rates out of kindness—it’s reacting to Canada’s economic reality. Here’s what’s been happening under the hood:
📊 Job Market: Stuck in Neutral
In February 2025, Canada gained just 1,100 jobs—not exactly a hiring boom.
The catch? Full-time jobs actually declined, and part-time positions filled the gap.
Unemployment remains at 6.6%, unchanged from January.
Translation: People are working, but job quality is slipping, which isn’t great for long-term economic growth.
📊 Inflation: Mission Accomplished?
Inflation is now at 1.9%, which is close to BoC’s target of 2%.
Unlike last year, inflation isn’t the main concern anymore (at least for now).
Instead, the BoC is now focused on keeping the economy from stalling and preventing a rise in unemployment.
📊 GDP Growth: Temporary or Troubling?
Canada’s Q4 2024 GDP grew by 2.6%—on paper, this looks solid.
But here’s the problem: This growth was likely fueled by temporary factors like the GST holiday and Americans rushing to buy goods before U.S. tariffs kicked in.
If the momentum doesn’t carry into Q1 2025, chances for more rate cuts increase.
💼 Meanwhile, in the U.S...
Since Canada’s economy is tied at the hip to the U.S., we can’t ignore what’s happening south of the border:
GDP is expected to shrink by 1.5% in Q1 2025.
Inflation is creeping back up to 3%, making the U.S. Federal Reserve hesitant to cut rates.
Unemployment is at 4%, but recent government layoffs, budget cuts and deteriorating outlook could change this.
Long story short: The U.S. economy is showing cracks, and if things go south fast, Canada won’t be able to avoid further fallout.
Mortgage Market Insights: What's Changing?
📉 Bond Yields & Fixed Rates
The 5-year bond yield is down 183 basis points from its peak in October 2023.
Fixed mortgage rates have also dropped by about 175-190 basis points—so far, borrowers have benefited from the decline.
The big question: Will lenders keep passing on these savings, or will they start holding back?
Banks and lenders don’t love lending money when the economy looks shaky—so they may keep a little extra for themselves in the coming months.
📊 Fixed vs. Variable Rates: The Battle Continues
Fixed rates have been lower than variable rates for couple of years now.
With today’s rate cut, that gap will shrink further—possibly disappearing in some cases (but maybe momentarily).
If rate cuts continue, variable rates could dip below fixed rates, returning to their usual pattern.
But banks have been shrinking the discount on variable rates since October 2024 and so new borrowers might not get the full benefit of the decline.
So, don’t assume that just because rates are dropping, variable will automatically become the better deal for new borrowers.
What Should You Do?
It depends on your risk tolerance and time horizon:
✔ If you prioritize stability: A fixed-rate mortgage is still the safer bet—especially at today’s rates, which are closer to long-term historical averages. Maybe opt for a shorter term.
✔ If you’re comfortable riding the wave: A variable rate could be a good play, but only if banks continue passing on the full rate cuts to new borrowers.
✔ If you’re on the fence: Why choose one boat when you can ride two?
A hybrid mortgage (part fixed, part variable) lets you split the risk—giving you the stability of a fixed rate while still benefiting if variable rates drop. It's like having a life jacket and a speedboat! 🚤💨
2025 Rate Outlook:
Markets are currently predicting another 0.25% to 0.75% drop in the Prime Rate over the course of 2025.
But let’s be real—markets have been wrong before.
The biggest wild cards that could change the BoC’s game plan:
1️⃣ Economic slowdown – If the U.S. enters a full-blown recession and trade issues persist, Canada will likely see more aggressive rate cuts.
2️⃣ Inflation surprises – If inflation flares up again, rate cuts could stall or maybe even lead to a rate increase. Retaliatory Tariffs by Canada won't help on this front but is there a choice?
3️⃣ Domestic & Global risks – Trade wars, supply chain issues, geopolitical drama, changing political landscape in our own country, all these could throw a wrench in the outlook.
🎯 The Bottom Line
The Bank of Canada’s rate cuts are good news for borrowers—but there are still risks on the horizon.
If you’re considering buying, refinancing, or renewing, now is the time to reassess your mortgage strategy.
📩 Need a game plan? Let’s connect and craft a mortgage strategy that fits your goals.
Schedule meeting per your convenience here.
Current Market Snapshot: 5-Year Bond Yields
As of today, the 5-year bond yield stands at 2.632%, quite a drop from 2.912% reported on our January newsletter. Bond markets have been in a downtrend since our last report since making a peak at 3.293% on January 13, 2025. The recent bottom was at 2.48% on 3rd March 2025.
Looking at the bigger picture, bond yields have dropped 183 basis points (bps) from their peak of 4.461% on October 2, 2023 and the prior low of 2.642% (September 16, 2024) was also breached. This increases the change for further reduction in coming days and weeks.
For those who love diving into the data, we’ve included detailed charts below—consider them your mortgage market crystal ball, minus the mysticism! 🔮📊
For those unfamiliar with terms like Insured, Insurable, Uninsured, or Rental, a concise explanation is provided in note# 1 below.
Note: The rates indicated below are the most commonly available rates for Prime borrowers. Many Qualified borrowers secure a lower interest rate than depicted below due to superior credentials. Interest rates with B-lenders and Private mortgages are at a premium to these levels.
The charts above show the trend in interest rate (2) for Fixed Rate Mortgage types for the last 41 months. The rates have fallen by about 1.75% to 1.90% from their peak in October 2023. For the shorter term (1-3 year) Fixed rate mortgages, the premium over corresponding 5-year rates have continued to reduce (eliminated in the case of 3-year term). Fixed rates have dropped by 0.20% to 0.30% since our last update.
Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate). This spread has reduced from the levels we saw in 2022-23 and is in the 1.35% to 2% range. This may increase if lenders anticipate a higher risk in lending their funds (more on the uninsured side).
The charts above show the trend in interest rate (2) for Variable Rate mortgage types for the last 41 months. Do note the Variable Rate Pricing will adjust later today or tomorrow to reflect the change in Prime Rate. The speed of adjustment in Variable Rate is much slower than the Fixed Rates given the dependency with Bank of Canada’s decision schedule. The rates are generally reducing at the same pace as the reduction in Prime Rate.
A higher discount on the chart generally signifies a heightened demand for Variable Rate mortgages. It reflects the dynamic interplay between borrower preferences and the response of lenders to this demand. Conversely, a lower discount may indicate a market shift towards Fixed Rate products.
We're likely entering a phase where more borrowers may choose Variable Rate mortgages due to the potential for a Prime Rate reduction but the risk premium is also increasing given tariff and economic headwinds. As a result, the discounts to Prime Rate is fluctuating month to month. We may not see a proportionate decline in new Variable Rate mortgages issued by lenders given the reducing discount.
Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but this relationship has been inverted for the last 28 months or so. However, given the steady drop in Prime Rate this gap has been reducing steadily. Variable rate mortgages are still at a slight premium to Fixed Rate (0.15% to 0.30%).and
1. Explanation of key terms
Insured – These mortgages are backed by a mortgage insurer like CMHC and borrower needs to pay an insurance premium. All properties purchased with less than 20% downpayment fall under this category and come with an amortization of 25 years (30 years for First Time Home Buyers / New Construction homes) or lower and purchase price cannot be higher than $1M ($1.5M for First Time Home Buyers).
Insurable – These mortgages require the borrower to have a downpayment of 20% or higher, amortization is restricted to 25 years or lower and purchase price cannot be higher than $1M.
Uninsured – These mortgages require the borrower to have a downpayment of 20% of higher but amortization can be 30 year or lower and purchase price can be higher than $1M.
Rental – These mortgages are specifically for Rental or Investment properties and need to have a downpayment of 20% or higher but come with amortization of 30 years (with most lenders) and purchase price can be higher than $1M.
2. Interest Rates depicted are those which are commonly accessible by most well-qualified borrowers with excellent credit and debt service ratios. Some borrowers might be able to secure an interest rate which is lower than these levels on account of superior qualification. Interest rates with B-lenders and Private mortgages are much higher than these levels.
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