Canadian Interest Rate Forecast to 2026

Last Updated December 12, 2024.

HIGHLIGHTS

• The Bank of Canada has trimmed its policy rate from a peak of 5 percent to 3.25 percent, signalling a growing urgency to return to the neutral range.

• This is the Bank’s fifth consecutive rate cut this year and marks a cumulative decline of 1.75 percentage points from the peak.

• The central bank defines the neutral rate as between 2.25% and 3.25%. Rates above 3.25% are deemed restrictive, intended to dampen economic activity and rein in inflation. Conversely, rates could fall below 2.25% in a recessionary scenario.

• The Bank of Canada rate directly impacts variable-rate mortgages and indirectly affects the five-year fixed mortgage rate. The 5-year fixed rate peaked in November 2023 and has declined by over a full percentage point.

• While economists agree that rates will continue to fall, some anticipate another quarter-percentage-point cut in 2025, while others expect the bank rate to drop three-quarters of a percent next year.

Inflation has cooled significantly, falling from its June 2021 peak of 8% to 2.0%. Core inflation—a more stable metric—currently stands at 2.6%. Inflation is near the upper bound of the Bank of Canada’s target range of 1.5-2.5%, with a 2% midpoint.

Despite signs of resilience in the economy, the central bank is eager to avoid overtightening, particularly amid global uncertainties. Interest rate cuts aim to mitigate recession risks, but critics caution that overly aggressive reductions could reignite inflationary pressures.

Mortgage rates and property prices remain tightly linked, with falling rates historically driving housing demand—and, in turn, higher prices.

This article examines forecasts for both variable and five-year fixed mortgage rates, shedding light on the outlook for borrowers.

THE CURRENT SITUATION

It often takes 18 months for rate cuts to ripple through the housing market.

Following the policy rate’s peak at 5% in mid-2023, the full effects of subsequent reductions may not materialize until late 2025 or beyond.

MORTGAGE RATE FORECASTS

Fixed-rate mortgages offer stability but come at a cost. Borrowers typically pay a premium for locking in rates over longer terms. Beyond that threshold, the extra cost for fixed-rate stability may outweigh the benefits?

• Variable rates are higher than fixed rates and are likely to remain high.

• Variable rates are likely to rise over the term of the mortgage, to the point where the average variable rate over the contract term is higher than the fixed rate on offer.

Fixed Rates Offer Stability But at a Cost

A fixed-rate mortgage term provides a sense of security for those anxious about volatile mortgage rates. Locking in your rate shields you from future increases, offering peace of mind—but this stability has potential downsides.

Beware of Cancellation Fee and Penalty Risks

Variable-rate mortgages are subject to a fee of three month interest, if you break the contract term (e.g., 5 year term).

Fixed-rate mortgage penalty fees can be higher. If you break a fixed-rate contract term, you can be charged three months of interest or a fee called the interest rate differential (IRD), whichever is higher. The IRD is often higher.

Read: Mortgage Cancellation Fees and Penalties

These are important considerations if you might sell or relocate in the next few years. Breaking a mortgage contract before the term ends can trigger hefty penalty fees.

Shall I Get A Variable Rate Mortgage?

Variable Rates: Risk and Reward

Variable mortgage rates are usually lower than fixed rates because borrowers shoulder the risk of fluctuating interest rates. However, due to post-pandemic inflation, variable rates are higher than longer-term fixed rates.

Also, variable rates are projected to remain above 5 percent well into 2025—a steep figure by historical standards. While there is a broad consensus that variable rates will continue to fall, there is little agreement on what the “new normal” will look like or how quickly we will get there. 2 percent mortgage rates are unlikely ever to return.

Economic Context and Forecast Assumptions

Economic forecasts, while informative, are not infallible predictions; they rely on models underpinned by assumptions. These assumptions vary, leading to differing outcomes, which is why Mortgage Sandbox offers a spectrum of projections alongside an average forecast for clarity.

The Bank of Canada’s role in shaping these forecasts is pivotal. Its guidance on policy rates often exerts more influence on predictions than underlying economic fundamentals such as GDP growth or employment trends. This is because central bank signals shape market expectations and guide lending behaviour. Economists frequently adjust their models to align with the Bank’s stated intentions, reflecting its significant sway over financial conditions.

Moreover, the U.S. economy, as Canada’s largest trading partner, exerts a substantial impact. U.S. economic growth, job creation, and interest rate movements ripple across the border, influencing Canadian exports, investment flows, and even domestic monetary policy. Consequently, Canadian forecasts must account for cross-border dynamics as well as local economic conditions.

Inflation and Interest Rates

On schedule, inflation has stabilized near its 2% target. Should inflation remain subdued and the economy skirt recession, rates will likely settle within the neutral range. However, a surge in house prices amid falling mortgage rates could complicate this trajectory, forcing the central bank to reconsider further cuts.

Further Reading: Why Is the Bank of Canada Lowering Your Borrowing Costs?

Fixed-Rate Mortgage Outlook

The five-year fixed rate aligns closely with the five-year Government of Canada bonds yield, plus a risk premium reflecting the relative riskiness of mortgages. Falling bond yields suggest further rate declines, though a widening risk premium in a recessionary environment could counteract this trend.

Bond rates are currently falling, but they are expected to hit a floor in 2025.

Variable-Rate Mortgage Outlook

Variable rates are shaped by the Bank of Canada’s policy decisions and lender risk premiums. While rates generally move in tandem with central bank adjustments, competitive pressures can cause deviations. Forecasts point to a gradual descent from current levels but caution against expectations of a return to ultra-low, pandemic-era rates.

As a result, forecasting variable mortgage rates depends on the central bank’s approach to maintaining a stable current and encouraging economic growth, as well as how lenders adjust their premiums in response to economic conditions.

Sources

To develop our analysis, we’ve surveyed the most prominent Canadian banks and their forecasts.

• BMO Bank of Montreal

• C1 Central1

• CIBC

• Desjardins

• National Bank of Canada

• RBC Royal Bank

• Scotiabank

• TD Bank

KEY TAKEAWAYS

We suggest contacting a Mortgage Broker as early as possible to lock in a rate. You can lock in your mortgage rate up to 120 days before closing on a home purchase or your mortgage renewal.

Further Reading: Our mortgage renewal guide that will help you navigate the process.

Is it a better time to Buy or Sell a home?

More economic factors are on balance, putting downward pressure on home prices than upward pressure. However, the same could have been said during the pandemic. Markets do not always follow the logic of economic fundamentals.

Homebuyer Advice

If you plan to buy a home within the next three years, be aware of the possibility of short-term price drops. Falling prices can make it harder to get financing, especially if your purchase completion date is more than a few months away.

Higher mortgage rates have shrunk the buying power of those dreaming of a bigger home. If you’re one of them, it’s time to take a hard look at your budget and adjust your expectations accordingly.

Home Seller Advice

Are you thinking of selling? Now might be the best time. The pandemic real estate frenzy is over, and many Canadian cities are pedcooling down. Prices have already dropped a bit from their peak, but you can still get a great deal. If you wait, you might sell faster in the Spring when the market heats up again, but prices could be lower in three to four months.

There is also a risk of a significant price correction in Canada. If one were to happen, a return to today's prices could take years.

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