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Prime Rate drops to 5.20%: 6th Reduction since June 2024

Writer's picture: Neil JosephNeil Joseph

Your Mortgage Newsletter

Welcome to the first edition of our Mortgage Newsletter for 2025!


The Bank of Canada (BoC) is still in a generous mood—extending the season of giving with another 0.25% rate cut this morning. This latest adjustment brings the policy rate down to 3.00% from 3.25%, marking the sixth consecutive cut and lowering the Prime Rate to 5.20%—a full 2% drop since the rate-cutting cycle began.


For homeowners with variable-rate mortgages or loans, this means even more relief. Since June 2024, borrowers have seen their monthly


Key Economic Drivers Behind the Rate Cut

Canada Market Conditions:

  • InflationNow below the BoC’s 2% target, sitting at 1.90% in November and 1.80% in December.

  • Economic GrowthGDP continues to remains sluggish, with a projected 0.1% decline for November 2024.

  • Jobs MarketA mixed bag—91,000 jobs were added in December, nudging the unemployment rate down to 6.70% (from 6.80% in November) but remains soft.


U.S. Economic Landscape:

  • UnemploymentStill low at 4.1% in December.

  • Inflation & GDP: Inflation is creeping back up - 2.7% in November and 2.9% in December, while Q3 GDP growth hit 3.1%, exceeding expectations.

  • Policy Risks: Proposed U.S. tax cut stimulus and potential tariff increases could sustain economic momentum south of the border, while keeping inflation stubbornly high.


Mortgage Market Insights

Bond Yields & Fixed Rates: The spread between bond yields and fixed mortgage rates has narrowed significantly compared to the past two years, returning to historical norms across all fixed-rate mortgage types. As market activity picks up—whether from new buyers entering the market or homeowners refinancing—expect this spread to remain tight unless economic uncertainty (or tariffs) causes risk premiums to rise.

 

Fixed vs. Variable Rates:

  • Current Gap: With today’s Prime Rate reduction, the gap between fixed and variable mortgage rates has nearly disappeared.

  • What to Watch: If this trend holds, variable rates could dip below fixed rates in the coming months—restoring the long-term pattern.

 

Variable Rate Discounts:

Lenders have been reducing discounts on variable-rate mortgages, particularly for insured products, where discounts are now at multi-year lows. As a result, borrowers choosing a new variable-rate mortgage may find themselves paying higher-than-usual spreads over the Prime Rate, compared to historical norms.


What Should You Do?

With economic uncertainty ahead, a fixed-rate mortgage may be the safer bet—especially if financial stability is a priority. However, be very cautious of the terms you sign up for. While additional Prime Rate cuts remain on the table, their extent and impact will depend on evolving trade policies, economic trends, and potential Canadian responses to U.S. tariffs.


For those comfortable with interest rate fluctuations, variable rates could still be a viable option—but the risk-reward balance is shifting. At present, 3-to-5-year fixed mortgage rates are aligned with long-term averages, making them an attractive choice for risk-averse borrowers.

 

2025 Rate Outlook:

Markets are currently pricing in another 0.50% to 0.75% drop in the Prime Rate over the course of 2025. However, this remains speculative, as U.S. policy shifts and global economic conditions will play a major role in determining the Bank of Canada’s next moves. Fixed Rates are not expected to drop unless the economic conditions drastically change. Risk is to the upside.


Need personalized advice? Let’s review your unique situation and craft a mortgage strategy that works best for you.


Current Market Snapshot: 5-Year Bond Yields

As of today, the 5-year bond yield stands at 2.912%, slightly up from 2.831% on December 11, 2024. Bond markets have been on a rollercoaster ride in recent weeks, peaking at 3.293% on January 13, 2025, before settling at current levels. Since November, yields have bounced between 2.90% and 3.30%, showing increased volatility.


Looking at the bigger picture, bond yields have dropped 155 basis points (bps) from their peak of 4.461% on October 2, 2023. While we haven’t revisited the recent low of 2.642% (September 16, 2024), market movements suggest continued unpredictability ahead.

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.

Trend - 5-year Fixed Mortgage Rate
Trend - 5-year Fixed Mortgage Rate

The charts above show the trend in interest rate (see note#2for Fixed Rate Mortgage types for the last 40 months. The rates have fallen by about 1.50% to 1.60% 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). 



Spread - Fixed Rate Vs. Bond Yield (5-year)
Spread - Fixed Rate Vs. Bond Yield (5-year)

Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate).  This spread appears to have settling down, unless we see very significant moves in bond yields in coming months. 


Trend - 5-year Variable Rate Mortgage Rate
Trend - 5-year Variable Rate Mortgage Rate

The charts above show the trend in interest rate (see note#2for Variable Rate mortgage types for the last 40 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. Their premium over Fixed Rate Mortgages appear to be behind us with today’s change.


Trend of Discount to Prime - Variable Rate Mortgage
Trend of Discount to Prime - Variable Rate Mortgage

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.


Spread - Fixed Vs. Variable Rate Mortgage Rate
Spread - Fixed Vs. Variable Rate Mortgage Rate

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 2 years or so.  However, with today’s rate change we are almost back to the long term pattern.and


Note: If you need help with your financing options, are interested in working with me or want to learn more about my services, please don't hesitate to get in touch. I'd be happy to chat! Schedule meeting per your convenience here.


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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