The Canadian housing market is experiencing a significant shift as financial markets react to the U.S. government’s decision to impose steep tariffs on Canadian goods. The tariffs—25% on most Canadian exports and 10% on oil and gas—have caused major economic turbulence, driving down bond yields and leading lenders to reduce fixed mortgage rates.
Table of Contents
While the drop in mortgage rates presents a potential opportunity for homebuyers, financial experts warn of economic instability that could have long-term repercussions. This article breaks down the impact of falling bond yields, mortgage rate cuts, and the broader consequences for the Canadian economy.
Plunging Bond Yields Push Mortgage Rates Lower
The Government of Canada’s 5-year bond yield—a key indicator influencing fixed mortgage rates—fell to 2.55%, its lowest point since June 2022, before rebounding slightly to 2.63% by Monday.
By Tuesday morning, bond yields climbed to 2.75% after reports surfaced that U.S. President Donald Trump had agreed to delay the implementation of tariffs for 30 days.
Despite the slight recovery, the drop in bond yields has already triggered rate reductions from several mortgage lenders, with cuts of 20–30 basis points (bps) expected this week.
What This Means for Homebuyers
- More Sub-4.00% Mortgage Rates: Some lenders have already rolled out fixed rates below 4.00%, and more are expected to follow.
- Short-Term Window for Lower Rates: Experts caution that these reductions may be temporary, as inflation concerns could push rates higher later in the year.
- Improved Housing Affordability: Lower fixed mortgage rates could boost affordability, making it easier for some buyers to enter the housing market.
Why Are Some Mortgage Rates Rising Even As Canada’s Lending Rate Falls?
Toronto Housing Market Forecast 2025: Trends, Insights, and Predictions
Canadian Mortgage and Real Estate Market Forecast for 2025
Secondary Suite Forgivable Loan Program 2025: A Boost for Housing Solutions
$80,000 Canada Secondary Suite Loan Program 2025 with Low interest rate of 2%
Economic Uncertainty Sparks Fears of a Recession
The sharp drop in bond yields reflects growing concerns among investors that the new U.S. tariffs will disrupt trade, weaken economic growth, and increase the chances of a Bank of Canada rate cut.
A recent report from RBC Economics outlines the potential impact:
- Canada’s unemployment rate (currently 6.7%) could rise by another 2–3 percentage points if the tariffs remain in place.
- Economic growth could be stunted for up to three years, with the largest negative effects occurring in the first two years.
In response, the Canadian government announced retaliatory tariffs on $155 billion worth of U.S. goods. While these measures target the U.S. economy, they are also expected to drive up inflation on specific goods in Canada.
What the Bank of Canada Might Do Next
The Bank of Canada (BoC) now faces a critical decision: should it cut interest rates further to support the economy, or hold steady to combat inflationary pressures?
Some economists believe the BoC will prioritize economic support, with National Bank suggesting the possibility of an emergency rate cut.
- BMO expects the Bank of Canada to lower rates at every meeting until October, cutting rates by 25 bps each time.
- National Bank predicts an emergency inter-meeting rate cut of at least 50 bps, with further reductions in March and April.
Could Canada Enter a Recession?
Economic forecasts indicate that if tariffs remain in place for 5–6 months, Canada could enter a mild recession.
A report from TD Economics suggests that a prolonged tariff conflict would deepen economic contraction, putting more pressure on the BoC to intervene.
However, Bank of Canada Governor Tiff Macklem remains cautious, warning that tariffs could lead to higher inflation by raising the cost of imported goods.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” Macklem stated. “At the same time, the higher cost of imported goods will put direct upward pressure on inflation.”
Despite this, economists believe the inflationary effects of tariffs will be short-lived, meaning the BoC is still likely to cut rates further to support growth.
Final Thoughts: Should Homebuyers Act Now?
With falling bond yields and mortgage rate cuts, many homebuyers may see this as an ideal window of opportunity to secure lower rates.
However, uncertainty remains. If inflation resurges or tariffs remain in place longer than expected, mortgage rates could rise again.
Experts recommend that prospective buyers and homeowners looking to refinance should closely monitor the market and consult with mortgage professionals to make the most informed decision.
The coming months will be crucial for Canada’s housing market, with potential BoC rate cuts, trade negotiations, and economic shifts shaping the landscape ahead.
Leave a Reply