Canadian Interest Rate Forecast to 2026

Last Updated October 24, 2024.

HIGHLIGHTS

• The Bank of Canada accelerated the pace of rate reductions on October 23rd, trimming its policy rate from 4.25 percent to 3.75 percent. This reveals increased urgency to move rates to within a neutral range. In this rate cycle, the rate has dropped 1.25 percent from the 5 percent peak.

• The central bank considers the neutral rate to be in the range of 2.25 to 3.25 percent. Any rate above 3.25% is deemed restrictive, designed to slow economic activity and contain inflation. The Bank would likely push rates below the lower bound of 2.25% in a recession.

• Since peaking in November 2023, the five-year fixed mortgage rate has dropped over 1 percent.

• Economists agree that the Bank of Canada policy rate is headed lower, but they disagree on the speed and magnitude of the reduction. Many economists expect another half percent reduction at the scheduled December announcement. Others believe the central bank will revert to smaller incremental moves, which is more typical.

The inflation rate, which peaked at 8% in June 2021, has just recently touched 1.6%, and the 'Core' or 'Trim' inflation, a more stable measure, stands at 2.4%. This information is crucial as it helps gauge the erosion of the value of savings and incomes. The Bank of Canada's target is a sustained inflation rate between 3 and 1 percent, with an average of 2 percent. September is the first month in 2024 when inflation was below 2 percent.

While the economy shows signs of resilience, the central bank is keen to avoid maintaining a tight monetary policy for too long, particularly as global economic uncertainties persist. By lowering interest rates, the Bank of Canada aims to ease the economic brakes and prevent a potential recession.

However, some economists warn that the aggressive rate cuts could fuel a resurgence of inflation in the long run. They argue that a more gradual approach might be necessary for sustainable economic recovery.

Recession risks persist, and if the Bank of Canada begins to lower rates quickly, the market might see it as a sign that it is more concerned about a recession than a return of inflation.

Low mortgage rates correlate with real estate price growth, and higher rates coincide with price cooling or corrections.

This article will forecast the variable (floating) and 5-year fixed (locked-in) rates. Keep reading to learn what the big banks are saying about rates.

THE CURRENT SITUATION

Rate cuts often take up to 18 months to ripple through the housing market. With the Bank of Canada's policy rate peaking at 5.00% on July 12th, 2023, the full impact is still unfolding. Similarly, though the recent 0.75% reduction to 4.25% is a positive development, it will take time before its effects are felt in the property sector.

This means some aggressive cuts late this year might not lift the property market until late 2025 or 2026.

MORTGAGE RATE FORECASTS

Is Now the Time to Lock in a 5-Year Fixed Rate?

Banks tend to charge a premium for the certainty of fixed-rate borrowing, with the cost rising the longer you lock in. So, is the price of peace of mind worth paying?

Opting for a 5-year fixed mortgage only pays off if variable rates fall by less than 1%. Beyond that threshold, the extra interest you pay for the stability of a fixed rate becomes an expensive hedge. With market fluctuations hard to predict, the question remains: how much certainty are you willing to buy?

A borrower opting for a five-year fixed rate today would lock in a rate lower than the current variable one.

However, many experts predict that variable rates will dip below the five-year fixed rate within the next two years. If their forecasts hold true, choosing a variable rate would prove to be the more cost-effective option in the long run.

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 Higher Cancellation Fees

If you plan to sell or relocate in the next few years, beware: breaking a fixed-rate mortgage before the term ends can trigger hefty penalty fees. Many overlook this risk when choosing the reassurance of a fixed-rate loan.

Sometimes, people get tripped up by cancellation fees when they are laid off or are offered an out-of-town promotion that forces an unplanned home sale.

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.

Understanding Economic Forecasts

Economic forecasts are not crystal balls; they are built on models driven by assumptions. Different assumptions lead to varying predictions, so Mortgage Sandbox presents a range of projections and an average of forecasted rates.

The Bank of Canada plays a key role in shaping these forecasts. Often, its guidance on policy rates has more influence than economic fundamentals. Economists tend to adjust their models to align with the Bank’s stated intentions rather than relying solely on raw data.

Forecast Assumptions: What Lies Ahead?

The Bank of Canada does not expect inflation to stabilize at its 2% target until sometime in late 2024. Its view is that the inflation surge was primarily due to supply chain disruptions, not a systemic issue.

The current Bank Rate is well above the “neutral range” of 2.25% to 3.25%. Should inflation cool and the economy avoid a recession, rates will likely return to this neutral zone. In a recession, rates may drop further, though a return to the ultra-low, pandemic-era rates is doubtful.

One wild card remains: if house prices surge as rates drop, fueling inflation, the Bank may hesitate to cut rates further.

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

Fixed-Rate Mortgage Forecast

The forecast for a 5-year fixed-rate mortgage is closely tied to the five-year Government of Canada bonds yield, which serves as the benchmark because the government is considered a virtually risk-free borrower.

Mortgages, while low-risk, carry more risk than government bonds. As a result, the average Canadian typically pays a risk premium of 1.5 to 2 percentage points above the government's borrowing rate. This difference, known as the "risk premium," reflects the additional risk lenders take on when issuing mortgages.

Bond rates are falling. If the risk premium holds steady, mortgage rates will likely follow suit. However, the risk premium could widen if the economy tips into a recession, pushing mortgage rates even higher.

Variable-Rate Mortgage Forecast

Variable-rate mortgage forecasts are primarily driven by the Bank of Canada’s target interest rate, which influences economic borrowing costs.

However, borrowers also pay a “risk premium” above the BoC target, reflecting the additional risk lenders take on. While the target rate and variable mortgage rates generally move in the same direction, they don’t always align perfectly. Market conditions and lender competition can cause variable rates to fluctuate more or less than the central bank’s rate changes.

As a result, forecasting variable mortgage rates depends on the central bank’s actions and 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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Canadian Real Estate Forecasts

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