Why 2025 could be the 'year of the variable rate'
Canadian mortgage borrowers flocked away from variable-rate options as the Bank of Canada embarked on a series of hikes in 2022 and 2023, seeing the popularity of those mortgage types – whose rate fluctuates in line with the central bank rate – plunge compared to their fixed-rate counterparts.
Shorter-term fixed rates became an increasingly attractive choice for borrowers, according to Canada Mortgage and Housing Corporation (CMHC), as buyers and homeowners alike locked in a set mortgage rate instead of seeing it spike alongside the Bank’s overnight rate.
TD Bank noted that many mortgage holders with one eye on upcoming mortgage renewals chose to “front-load the payment shock” by switching from a variable to fixed-rate option. About 14% of $520 billion in variable-rate mortgages were either prepaid or refinanced into fixed rates by the end of 2022, the bank said.
But with the central bank having pivoted to rate-cutting mode in 2024, introducing a series of reductions totalling 175 basis points, borrower sentiment could be veering back towards variable rates.
Those cuts – and the prospect of further moves to bring rates lower in the coming 12 months – mean 2025 is shaping up to be a big year for variable rates, according to Newfoundland-based broker Robert Jennings (pictured top) of East Coast Mortgage Brokers.
He told Canadian Mortgage Professional that the likelihood of prime rates sliding again in the months ahead meant the industry was gearing up for a competitive year, particularly when it comes to mortgage renewals and refinances.
“It’s going to be a very competitive battlefield in 2025 and will likely be a decreasing rate environment,” he said. “Everyone is going to be fighting for that business. We noticed over the last couple of years when rates were increasing, some banks were in the game. Some banks were on the sidelines and it allowed for us to help a lot of people to book a lot of mortgages.
“Our services, advice and information were more important than ever. I’ve already labelled 2025 the year of the variable-rate mortgage. It’ll be a very, very competitive landscape.”
Fixed-rate advantage over variable continues to narrow
The central bank’s five rate reductions in 2024 mean the gap between fixed and variable has been steadily whittled away, although fixed rates have also slipped since June and are projected to tick down further in 2025.
But the Bank of Canada has made little secret of the fact that it expects to continue trimming its benchmark rate amid a darkening economic outlook and uncertainty about the looming prospect of tariffs from the incoming US administration.
BMO's Doug Porter suggests the Bank of Canada’s recent 50-basis-point rate cut could help boost Canada's housing market, although the anticipated recovery remains tempered by affordability issues and a slower economy. https://t.co/59zZfFnQT8
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 12, 2024
Governor Tiff Macklem said after the Bank’s latest rate cut that US president-elect Donald Trump’s plans for a 25% tariff on all Canadian goods entering the country were “highly disruptive” and “a major source of uncertainty” as 2025 comes into view.
Those would “have a big impact on the Canadian economy and… dramatically impact our forecast,” Macklem said last week.
The central bank’s former deputy governor Paul Beaudry said last week that he believes policymakers will continue cutting until the key interest rate drops to 3.75%.
Could government giveaways complicate the outlook on interest rates?
With the Bank’s spate of aggressive rate hikes firmly in the rearview mirror, Jennings also questioned whether recent federal government giveaways made sense. “I’m of the mindset that rates and the economy are cyclical,” he said. “We’re going to go through a rough patch and I know the current government is printing money and GST rebates and there’s all kinds of free money showing up in people’s accounts.
“That’s very inflationary, and they’re trying to create a soft landing. I’m a firm believer that we’re on the back end of a rate cycle and we’re all looking forward to a rate decrease. We’re definitely on a downward-trending economic cycle and it’s going to get a lot worse before it gets better. But that’s the nature of the beast – we live in cycles.”
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