With inflation at the Bank of Canada’s 2% target, analysts expect rate cuts to continue into next year. Experts say Canadians should expect lower mortgage rates and better deals in 2025.

Canadians have faced higher interest rates for a few years. The Bank of Canada raised its policy rate to combat soaring inflation. Since June, the central bank has cut its benchmark rate by 175 basis points over five decisions. This includes two jumbo 50-point cuts in October and December. The Bank’s policy rate now sits at 3.25 per cent. Economists expect the Bank of Canada to cut interest rates next year, but at a “more gradual” pace.

2025 could be the comeback year for the variable-rate mortgage.

With interest rates falling, 2025 may see renewed interest in variable-rate mortgages.

“We can expect some drop in variable rates. ‘The fixed-rate side will be more challenging,’ said Penelope Graham, a mortgage expert at Ratehub.ca, in an interview with Yahoo Finance Canada. Variable-rate mortgages adjust with the prime lending rate. The BoC’s policy rate changes affect them. Graham notes that the bond market affects fixed mortgage rates. It has seen yields remain ‘very, very sticky.’ Since Oct. 1, the benchmark 5-year bond yield has ranged from 2.74 to 3.31 percent.”

“Fixed mortgage rates haven’t changed much in the past few months. We don’t expect that to change until mid-next year. Unless something reassures the markets.”

“But with the way things are currently looking, there’s nothing on the radar that might suggest that.”

Victor Tran, a Toronto mortgage broker and Ratesdotca expert, says interest in variable rates rose in the summer after the central bank cut its rate. With variable rates above fixed rates, he says homeowners are “seeing a light at the end of the tunnel.” They will endure the short-term pain of the higher rates.

“A lot of customers are saying they are willing to accept a higher variable rate and a higher payment for now.” But give it another three or four months, we could be ahead,” Tran said in an interview with Yahoo Finance Canada.

Graham and Tran both expect variable-rate mortgages to fall below fixed rates in 2025. But fixed rates are still popular among mortgage holders. Tran expects three-year fixed terms to remain a top choice. They have surged in popularity over the last few years.

‘More bargaining power’ for 2025 renewers

Going into 2025, there are still around 40 percent of mortgages that are up for renewal. As the Bank of Canada cut rates, worries about renewal price shocks faded. But many Canadians will face financial pressure as they renew at higher rates.

The good news for those renewing their mortgage is that banks will compete for customers. This could lead to better deals, Tran says.

“Anyone up for renewal in the next year will pay a higher rate,” he noted.

“There is a bit of relief now since rates have been coming down. The removal of the stress test rate for renewals gives Canadians more options. They can now shop around and negotiate more. It will be competitive in 2025, and we may see some crazy offers.”

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, will no longer require a stress test for borrowers with uninsured mortgages when switching lenders. That should give some borrowers more flexibility to shop around, Graham says.

“With new business and easier lender switching at renewal, we expect banks to be very competitive on rates,” Graham said.

“We expect to see some of the mortgage rate-war pricing from years past. A lender may launch a great promo. Then, smaller lenders may chip away at it, point by point, to gain an edge.”

But there is a big caveat when it comes to 2025 expectations, Graham warns. That’s economic uncertainty for next year. It’s due to President Trump’s threat to impose tariffs on Canadian imports. People worry about the impact on the Canadian economy.

“Right now, every economist wonders if these tariffs will happen. If they do, we’re looking at a very different scenario,” Graham said.

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With the holiday season in full swing, many Canadians focus on gift-giving. For some, it means helping loved ones buy a home by contributing to their down payment.

If so, you’re not alone. In recent years, gift-giving has become more common. High living costs have forced many Canadians to seek help from loved ones to get their first mortgage.

In 2024, 30% of first-time buyers received gifts for their down payment, a Canada Mortgage and Housing Corporation survey found.

A study by Mortgage Professionals Canada found that 60% of buyers who got financial help couldn’t afford their homes without it.

“For first-time homebuyers, that percentage is way up. From my book of business, it’s 65% or 70%,” notes Tracy Valko, Principal Mortgage Broker with Valko Financial. “The high rate of inflation we’ve had and the high cost of living limit the amount young people can save now for a down payment.”

Down payment gifts are no longer for first-time buyers.

Valko sees more people relying on gifts to secure homes as they move up the property ladder. For example, young families want to buy larger homes as they have children.

“Move-up buyers” are a group of homebuyers. They have relied on their own resources for many years to buy larger family homes. But, with rising home prices and tools like the FHSA for first-time buyers, they feel the strain.

“They’ve got great equity. They’ve built it up over five years. But, it’s not enough to get them there. It’s not enough to qualify or afford it with the high rates,” adds Valko.

What you need to know when giving a down payment.

If you’re considering helping with a down payment, it’s important to be aware of the risks.

Tip #1:

A top priority is to ensure your loved one discloses the gift to their broker and potential lender. This may add complexity. Some lenders may distrust gift money. But it can prevent major issues later. These include a denied application or, worse, an unaffordable mortgage after qualification.

A CMHC survey found that, in 2024, the average size of down payment gifts in Canada soared to $77,487. In high-demand markets like B.C., the average exceeded $150,000. This increase reflects a shift in the risks of first-time homebuyers’ mortgages.

“I’m seeing many borrowers with six-figure gifts,” says Clinton Wilkins of the Clinton Wilkins Mortgage Team.

“Imagine you’re a first-time homebuyer. Your parents are giving you over $100,000,” he said. “People are coming in with large gifts and using conventional mortgages.” Years ago, first-time homebuyers got a high-ratio insured mortgage from the CMHC. So, it has changed the nature of first-time homebuyers a bit.”

Tip #2:

Another important step to cut the risks of gift giving is to address how the parties will handle the gift if the mortgage needs to be unwound. It’s not the most festive topic. It’s best to tackle it after the holidays. But, it’s crucial to know how to protect a gift in case of a divorce or asset division.

No matter your intent for your child’s gift, you must collaborate with your loved one and their spouse. You must clearly document your wishes in a binding agreement. “Make sure you’re speaking to your real estate lawyer,” says Valko. “I’ll tell you. Many clients have split up. They thanked me for having this in place. I’ve seen what happens without an agreement.”

Valko explains that disputes often arise during separations. This happens when couples do not agree on gifted down payments. “The wife’s parents gave $200,000 and she’s got to split the equity… It’s heartbreaking.”

Tip #3:

A final, often-overlooked risk for gift givers is to avoid gifts that could harm their financial stability. It’s natural to want to help loved ones. But overextending your resources to support their homeownership goals could harm your nest egg.

A 2020 survey by the Canadian Institute of Actuaries found that many Canadians underestimate both the length and cost of retirement. This may lead them to overestimate their ability to give. To avoid this, check the gift’s impact with your planner or mortgage professional.

For those with financial security, a down payment gift can provide significant benefits. This is due to the careful risk assessment and the steps taken to give it.

“I appreciate, from the gift-giver’s view, that it helps achieve a dream of homeownership.” “They can celebrate that with the gift receiver while they are still alive and able,” adds Wilkins. “I hear so many people say, ‘I wish I had done this 10 or 20 years ago.’”

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A Surge in Home Buying Activity Across Canada

Recent months have seen a significant uptick in home buying activity across Canada. The Canadian Real Estate Association (CREA) says home sales rose by 26% last month from 2023. This followed an impressive 30% increase in October, marking a steady upward trend.

Several factors are driving this resurgence. One is the Bank of Canada’s interest rate cuts. These cuts have encouraged many buyers to enter the market. This may continue into 2025.

Rate Cuts Boost Homebuyer Confidence

The Bank of Canada’s aggressive rate cuts are reviving the housing market. In December, the central bank announced a 50-basis-point reduction in its benchmark rate. This was the second consecutive oversized cut, bringing much-needed relief to borrowers.

BlueShore Financial advisor Nico Wong said this move helps homebuyers. It boosts their budgets and borrowing power. Lower borrowing costs improve mortgage affordability. They also free up funds for other goals. “Wong stated, ‘The rate cut is good for mortgages, car loans, and even student loans.’ It has wider financial effects.”

Shifting Mortgage Qualification Rules

Also, rate cuts and new mortgage rules should boost the market. New measures could help prospective homeowners. They include a higher mortgage insurance cap and longer amortization periods for first-time buyers and new homes.

CREA’s senior economist, Shaun Cathcart, noted that these trends could lead to a busy winter for Canada’s housing market. However, experts remain cautious about predicting a dramatic surge in activity.

Regional Variations in Market Recovery

The housing market recovery is unfolding at different paces across Canada. RBC’s assistant chief economist, Robert Hogue, says some regions are more active than others.

• Prairies and Atlantic Canada: Activity levels there exceed pre-pandemic figures.
• British Columbia and Ontario: Sales in Vancouver and Toronto have risen for months. But, a full recovery will likely require deeper rate cuts.

This uneven recovery shows how local markets shape home buying trends.

Affordability Challenges Persist

Despite the positive momentum, affordability issues remain a concern for many buyers. Rising home prices, coupled with high demand, could limit the purchasing power of some households. Affordability issues will persist, especially in major urban centers. This is despite recent rate cuts and policy changes.

What to Expect in Early 2025

The December rate cut has lifted spirits. But, experts warn against expecting a hot housing market at the start of 2025. As Wong pointed out, the holiday season is traditionally a slower period for real estate activity. The spring market has an optimistic outlook. Increased purchasing power should attract more buyers.

Hogue also predicted a “measured pace” of market activity in the short term. This balanced approach suggests steady growth, not a sudden spike. It will ensure a more sustainable recovery for Canada’s housing market.

Conclusion: A Promising Yet Cautious Outlook

Canada’s housing market is poised for continued growth, thanks to lower borrowing costs and updated mortgage rules. While regional differences and affordability challenges remain, the overall outlook is promising. As we move into 2025, homebuyers can look forward to more opportunities, particularly during the spring season.

With good planning and the right market, now may be the time for Canadians to realize their homeownership dreams.

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Recently I wrote a blog post regarding an announced change to CMHC’s mortgage qualification guidelines that were potentially damaging to the real estate market and to buyers looking to get into the real estate market.  It would have also resulted in higher rates for many homeowners looking to renew or refinance their mortgages.

In that email, I had mentioned that the effect of these policy changes would depend on what the other mortgage insurers would do.  At that time, I was not particularly optimistic that they would maintain the current policies, as the government has an influence on their policy decisions.  However, they have since confirmed that they will maintain the policies as they are.

As a result of these announcements, the negative effects of CMHC’s decisions have been largely mitigated, at least for the time being.  It is not inconceivable that the other insurers (Genworth and Canada Guaranty) could change their policies in the future.

The effect of these events will be that CMHC will largely become a minor player in the mortgage insurance space, and I expect that the market will continue to be largely unaffected by those changes from CMHC.  I do not know or foresee any other changes in how it will affect business at this time.

If you have any questions, please feel free to follow up with me.

With the COVID-19 pandemic reaching its second week of interrupting our regular daily lives, there have been increasing questions in the wake of business closures and layoffs about how mortgage companies will face the significant disruption to the lives home owners.

The news of the COVID-19 pandemic weighs heavily on all of us, from the public in general, to my mortgage clients, my brokers and to ourselves and our families.