Are Mortgage Rates Headed Higher or Lower? Breaking Down the Key Forces

The big question on everyone’s mind is: Will mortgage rates go up or down? It’s a tug-of-war between forces pushing rates lower and those keeping them elevated. Here’s a breakdown of the key factors shaping the future of rates.

Forces Supporting Lower Mortgage Rates

1. Bank of Canada (BoC) Easing - The BoC’s efforts to lower rates can drive bond yields down, which often leads to reduced mortgage rates. However, markets may already be anticipating further accommodation, muting its impact.
2. Potential U.S. Tariffs
   If the U.S. imposes significant tariffs on Canada, it could slow GDP growth substantially, pressuring rates to fall.
3. Population Declines
   Fewer people participating in the economy means less spending and investment, which can lead to slower growth and lower rates.
4. Weak Labour Market Trends
   Declining hours worked and softening wage growth are signs of economic slack, which tend to lower borrowing costs.

Forces Pushing Against Lower Mortgage Rates

1. Bank of Canada Easing (Again) - While initial rate cuts reduce yields, too much stimulus can eventually spark growth, prompting markets to expect rate hikes.
2. Potential U.S. Tariffs (Again)
   Tariffs could raise the cost of goods, inflating prices and fueling inflation expectations, which may increase rates.
3. Economic Resilience
   Canada’s economy is still showing signs of strength, with rising full-time employment and a rebound in housing activity. These factors can keep rates stable or higher.
4. Core Inflation Trends
   Inflation may be muted in the short term, but core inflation is creeping upward, creating resistance to lower rates.
5. Government Stimulus Spending
   Consumer spending remains robust, buoyed by potential federal stimulus programs. This spending props up inflation, making rate cuts less likely.
6. Strong Wage Growth
   Wage growth remains strong, ranging from 3.9% to 5.5% depending on the data source. This supports inflation and limits rate cuts.
7. Currency Depreciation
   A weaker Canadian dollar boosts export competitiveness but increases import costs, which can fuel inflationary pressures.
8. Rising Term Premiums on Bonds
   Bond investors’ concerns about government spending have driven term premiums higher, adding upward pressure on rates.

Why It’s Hard to Predict Rates

While market pricing reflects the collective wisdom of traders, even “Mr. Market” struggles to look beyond a year with clarity. Research shows that traders’ projections beyond one or two quarters often lack accuracy.

For borrowers who are risk-averse, this uncertainty underscores the importance of hedging their bets. Inflation, growth, and policy surprises could shift rate expectations dramatically in either direction.

What Should You Do?

In a market this unpredictable, the smartest move is to evaluate your options now. Whether you're buying, refinancing, or renewing, preparing for different scenarios can help you lock in savings or avoid unexpected costs.

Want to discuss your strategy? Reach out today—we’ll help you build a plan that’s tailored to your goals.