Even mild rate cuts in the month ahead could be unlikely with bond yields rising and the BoC potentially staying on hold
Hopes of an imminent interest rate cut by the Bank of Canada are fading rapidly after inflation rose last month and the labour market continued to show stronger-than-expected growth.
That means variable mortgage rates won’t be on the way down anytime soon – and fixed rates are also set to creep higher, with five-year Government of Canada bond yields shooting upwards after US president Donald Trump’s latest threats of a tariff salvo.
That five-year government bond, a key influence of fixed-rate mortgages, sat just below 3.1% at time of writing, nearly 20 basis points higher than its level at the end of June.
Meanwhile, the Bank of Canada is almost certain to keep its policy rate – which leads variable mortgage rates in Canada – unchanged in its decision at the end of July, with economists even suggesting it could opt against a September cut.
Mortgage market watchers hoping a brighter rate outlook could spur an uptick in activity are likely to be waiting a while longer for borrowing costs to drop.
What’s certain is that elevated rates – at least compared with those seen over the past 15 or so years – are here to stay, according to Alberta Central chief economist Charles St-Arnaud.
He told Canadian Mortgage Professional that brokers and buyers alike would be wrong to hold out hope for a big drop in interest rates anytime soon.
“I think one of the things consumers will have to adapt to is realizing that the low-interest-rate regime that we were in the whole decade after the global financial crisis and during the pandemic era is not coming back,” he said.
“We’re now in a longer-term period where interest rates will be higher than what we’ve seen over the past decade, and households will need to adjust their expectations on that, and the housing market will also have to adjust with that.”
Nearly two-thirds of Canadians say they need interest rates to fall, according to the latest MNP Consumer Debt Index, which held steady at 88 points this quarter.https://t.co/MwFYA68SlD
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 17, 2025
Affordability remains a major hurdle despite slight improvements
While home prices have slipped in many major markets across the country over the past year because of a slower pace of purchase activity, plenty of buyers – especially first-time entrants to the market – are facing a grim affordability outlook.
According to Ratehub.ca, eight major markets – Halifax, Montreal, Toronto, Calgary, Ottawa, Victoria, Vancouver, and Hamilton – all require a six-figure income to purchase an average home as of May, even as affordability improved in the last four of those cities.
In May, Toronto-based mortgage broker Victor Tran told Canadian Mortgage Professional even a 10- or 15-basis-point increase in fixed rates, while mild, could make or break a buyer’s hopes of getting a deal over the line.
Home price growth to moderate as rates weigh down market
Sluggish national housing market activity in the opening half of this year led Royal LePage to trim its expectations this week for overall 2025 price growth, although it believes the average national home price will have risen 3.5% (year over year) by the end of Q4.
The real estate giant cut its price forecast partly because of what its president and chief executive officer Phil Soper described as “hesitation” from homebuyers amid economic uncertainty and a lack of clarity over what’s in store in the trade war.
St-Arnaud said the reality of higher interest rates for longer will likely keep a ceiling on home price growth across the country, although there’s more room for price appreciation in more affordable markets.
“When we look at the broad housing market, it will be hard to make significant home price gains in the next few years, with rates staying [high],” he said, “especially in expensive markets.
“At the lower end of the spectrum where there’s a lot of affordability you could still see some very strong increases in prices at current interest rates. But in places like Toronto and Vancouver it becomes harder because higher interest rates for longer are changing the dynamic on affordability.”
Soper, in remarks accompanying Royal LePage’s press release, pointed to mild affordability gains in recent months but emphasized the need for further progress on that front. “Wage growth is outpacing home price gains in many markets, and borrowing costs have eased over the past year,” he said. “But these gains remain fragile.”
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