Canada’s mortgage market is reacting to fears this week that United States President Donald Trump’s threatened tariffs could deliver a sharp blow to the Canadian economy.
Experts say that home buyers and owners with a mortgage up for renewal could secure a cheaper rate amid the dysfunction, but also warn that the forecast for the spring housing market is far from clear thanks to the lingering uncertainty.
The five-year Government of Canada bond yield saw a sharp decline on Monday in the wake of Trump’s weekend announcement that blanket tariffs would hit the Canadian economy on Tuesday — an order that he later pushed to instead take effect in 30 days.
That metric — a key input for popular five-year, fixed-rate mortgages in Canada — fell roughly 20 basis points when markets opened to as low as 2.58 per cent, a low not seen since April 2022, according to Ratehub mortgage expert Penelope Graham.
Trump’s deferral later in the day led to a recovery in the key yield, but it has continued to falter since, holding just above 2.62 per cent on Wednesday afternoon. That’s well below recent highs of roughly 3.28 per cent in mid-January.
Graham in a release explained that investors were looking for safe haven investments rather than stocks amid fears of a Canadian recession resulting from the tariffs.
But even with the most immediate fears abating, she said that Canadians are “already enjoying discounts,” with the lowest available five-year, fixed mortgage in Canada holding around 3.89 per cent as of Tuesday, according to the rate comparator. The cheapest options will largely be in the insured mortgage space where buyers have put less than 20 per cent down on their purchase.
While the Bank of Canada’s interest rate decisions affect variable-rate mortgages in the market, fixed mortgages are tied closely to bond yields, which reflect bets for where the central bank’s policy rate will be in the longer term.
The Bank of Canada last week dropped its benchmark interest rate by a quarter of a percentage point to 3.0 per cent, its sixth consecutive cut since June.
Bank of Montreal on Monday released a revised outlook that forecast a full percentage point of additional interest rate cuts if Trump were to impose his threatened tariffs, on top of the 50 basis points of cuts already in the lender’s baseline economic scenarios. The need to gird Canada’s economy against the worst of the tariff impacts would outweigh upward pressure on inflation in the central bank’s mind, BMO argued.
Victor Tran, mortgage and real estate expert at rates.ca, tells Global News that some lenders in Canada lowered their fixed-rate mortgages in the immediate aftermath of Trump’s tariff declaration and the resulting bond yield drop on Monday.
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Fixed rates in the market dropped between five and 10 basis points, Tran says, and largely among the smaller, monoline lenders.
Canada’s Big Six banks have yet to lower their fixed mortgage rates on offer, he explains, and are “treading cautiously” amid the ongoing uncertainty.
Banks need to protect their profit margins, Tran says, and won’t rush to lower fixed rates with mortgage deals on the books but not yet closed.
“If they drop rates too quickly, then it causes quite a bit of panic potentially with a lot of the mortgage clients in the pipeline that have not closed those deals yet,” he says.
That said, he argues Canadians “could expect some fixed rate drops in the coming days.”
Mortgage options for Canadians to consider
Graham argued that Canadians who have a renewal coming up, or those who are eyeing the spring housing market, ought to get a rate secured now, as it’s unclear whether the yields will continue to drop or reverse course if Trump were to waive off the tariff threat for good in the weeks to come.
“If you’re currently shopping for a mortgage rate, it’s important to strike while yields are still trending lower, and secure a rate hold and pre-approval to guarantee access to the fixed-rate pricing that’s available today, before markets shift again,” she said.
Tran agrees. Most lenders will offer clients a 120-day rate hold on their mortgage offer, allowing would-be homebuyers to lock in today’s lower rates even if they rise in the weeks ahead, but also take advantage of future rate drops before they sign for a purchase, he explains.
He also argues now is a good time to consider a variable-rate mortgage, with expectations from most economists that the Bank of Canada will deliver additional interest cuts in 2025, even if the tariff threat does not fully materialize.
Tran says the spread between fixed and variable mortgage rates is quite close in today’s market, and it would likely only take one or two additional cuts in the next three-to-six months for a homeowner to realize savings on a variable rate over the more secure fixed option.
“There’s always going to be a risk element going for the variable rate. But I think it’s a calculated risk that a lot of people would have to look at,” he says.
Trump’s tariff threats are also looming large over the traditionally busy spring housing market.
While Tran says the lower mortgage rates will help with affordability and buying power, he argues that some Canadians might be feeling hesitant with the tariff cloud lingering. A job loss or sudden renewed surge in the cost of living might have some would-be buyers thinking twice about the housing market right now, he says.
“There’s definitely demand out there for housing. Lots of buyers standing on the sidelines,” Tran says. “But due to the instability that we’re seeing in the political world, I think a lot of people are scared to make the biggest purchase of their lives.”
Graham said that “even rock-bottom interest rates will do little to support demand” in the event of a sharp downturn in the economy and widespread job losses.
She noted, however, that depending on the fiscal and monetary policy response to tariffs, Canadians could face a repeat of the COVID-19 pandemic’s hot housing market, when cheap borrowing costs and government stimulus fuelled a “psychological urgency” among would-be homebuyers.
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