The economy has been on a wild ride – and that unpredictability has spilled over into mortgage rates. Will the next six months see a change?
A chaotic first six months of the year for Canada’s economy is drawing to a close – a period that’s been marked by annexation threats from Donald Trump, the launch of a punishing global trade war by the US government, and a change in leadership in Ottawa under new prime minister Mark Carney.
That political turmoil has roiled financial markets and raised fears of massive job losses and a sharp contraction for the national economy amid massive US tariffs on imports from Canada.
It’s also sent interest rates on a rollercoaster ride, with five-year Government of Canada bond yields – a key influencer of fixed mortgage rates – seeing a series of rapid spikes and dives throughout the year to date.
Where are fixed rates headed for the rest of the year?
That five-year yield is the “sweet spot” in determining where fixed mortgage rates are headed in Canada, Dominion Lending Centres (DLC) chief economist Sherry Cooper (pictured top) told Canadian Mortgage Professional – but they could be less prone to big jumps in the next six months than longer-term rates.
That’s because federal budgetary strains in both Canada and the US are likely to impact longer views of the market more than short- and immediate-term rates.
“The US is running enormous federal government deficits and, as a result, we’ve seen a steepening yield curve in the US as 30-year yields have risen and short-term interest rates have edged downward,” Cooper said.
“In Canada, we’re not going to have a budget this year, but certainly given all the potential projects that could be approved to improve Canadian domestic economic activity and also to create new trading partners, our budget deficits could increase as well – which means longer-term interest rates rise, even if shorter interest rates come down.”
The five-year yield has whipsawed from a high of nearly 3.28% on January 13 to a current level of about 2.93% at time of writing, although it’s experienced a noteworthy uptick since the beginning of April and the launch of Trump’s so-called “Liberation Day” global tariff war.
All eyes on the Bank of Canada as it weighs up a return to rate cuts
Trade tensions and economic storm clouds have seen lenders assume an increasingly cautious outlook on the mortgage market, tightening their lending appetite in the first half of the year and in some cases adopting a stricter approach to certain borrower types.
But while the Bank of Canada, whose benchmark rate leads variable mortgage rates, has held rates steady in each of its last two announcements, most observers expect it’ll be back in cutting mode before long amid growing signs of a sluggish economy.
While Bank of Canada interest rate cuts are expected later this year, borrowing costs aren't set to plummet, according to Doug Porter, Chief Economist at BMO. The central bank remains cautious, partly due to inflation risks from the ongoing trade war. https://t.co/mqrj2dtQW5
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 7, 2025
The central bank tapped the brakes on a series of seven straight rate cuts in April and left its overnight rate unchanged last week, but acknowledged it was operating in an environment of extreme uncertainty and volatility as a result of US trade policy.
Bank of Montreal (BMO) and National Bank both see the central bank’s overnight rate hitting 2% by the end of the fourth quarter, with Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and TD Bank all expecting that rate to slide to 2.25%. Among the Big Six lenders, only Scotiabank forecasts no change in the Bank’s key rate by the end of the year.
Cooper also views more rate cuts by the Bank this year as a likely prospect, a move that would be beneficial for both variable and fixed mortgages (the latter because of likely downward pressure on bond yields).
“Fixed mortgage rates have been inching upwards as banks are less accommodating and lenders in general are less accommodating because of increased risk,” Cooper said. “So I don’t think that five-year yields are going to rise as much as 30-year yields, but Canada’s economy is extremely interest-rate sensitive, much more sensitive to interest rates than the US because we don’t have these 30-year fixed-rate mortgages.
“And as a result, I think our economy will flow and that the Bank of Canada will take short-term interest rates down, even though the budget deficits could keep upward pressure on longer-term interest rates.”
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