High housing costs and mortgage interest rates have long dampened the dreams of many Canadians hoping to own a home. However, changes in the market are slowly starting to turn the tide. The Bank of Canada (BoC) has been reducing its key interest rates over the past year, with more cuts expected in the near future. In addition, the government is introducing new measures to improve home affordability. Here’s a look at some key changes and what Canadians can expect in the housing market in 2025.
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The Government’s Efforts to Improve Home Affordability
The Canadian government has introduced several initiatives aimed at making homeownership more attainable. The most recent of these took effect on Sunday when Ottawa raised the price cap for insured mortgages from $1 million to $1.5 million. This price cap hadn’t been adjusted since 2012, and the new measure will help more Canadians qualify for mortgages with a down payment of less than 20%.
Another measure implemented on the same day is the expanded eligibility for 30-year amortization for first-time homebuyers and those purchasing new builds. Additionally, Canada recently ended the requirement of stress tests for insured mortgage switches. These changes are expected to ease the financial burden on homebuyers, especially those entering the market for the first time.
What Does 2025 Hold for the Housing Market?
Despite these positive changes, experts warn that the road ahead may not be smooth. Penelope Graham, a mortgage expert at Ratehub.ca, cautions that 2025 will likely be another tumultuous year, with global uncertainties, including the possibility of a second Trump presidential term and a potential trade war, adding to the economic volatility.
While the future may be unpredictable, there are several mortgage trends emerging that Canadians should keep an eye on as they plan for the year ahead.
Mortgage Rate Predictions: Variable vs. Fixed
With the Bank of Canada continuing to cut interest rates, 2025 is expected to be a strong year for variable-rate mortgages. Experts predict that another 50-75 basis points reduction could bring the overnight lending rate to between 2.5 and 2.75 percent, causing variable mortgage rates to fall to the mid-3% range.
On the other hand, fixed mortgage rates are expected to stabilize, as bond investors are likely to hold firm in the face of ongoing economic uncertainties. If you’re considering a mortgage, this is an important factor to keep in mind as you weigh your options.
Short-Term Borrowing: A Growing Trend
Given that long-term fixed rates are stagnating, more borrowers are opting for shorter-term mortgages. Two- and three-year fixed terms are becoming popular because they offer a balance between shielding borrowers from short-term volatility while still allowing flexibility for future changes without the risks associated with variable-rate mortgages.
A Rate Pricing Battle on the Horizon
2025 is shaping up to be a year of competition for mortgage lenders. With approximately 1.2 million fixed-rate mortgage holders due for renewal, lenders are expected to compete aggressively to attract borrowers, particularly as the stress test requirements for many renewing borrowers have been relaxed. This opens up opportunities for Canadians to switch to a new bank if they’re offering a better deal.
Graham notes that mortgages are considered “anchor” products, meaning lenders will likely offer competitive pricing on both new purchases and mortgage renewals to capture market share.
Increased Homebuying Activity in 2025
After a relatively slow year for home purchases, demand is expected to pick up in the latter months of 2024, and this trend is likely to continue into 2025. The combined effect of lower mortgage rates and new policies on amortization and down payments is expected to improve affordability and drive increased homebuying activity in the early part of the year.
Less Mortgage Renewal Shock for Borrowers
One of the most notable trends for 2025 is the reduction in the payment shock many borrowers face when their mortgages are due for renewal. With mortgage rates lower than in previous years, particularly for those who secured low rates during the pandemic’s early years, many borrowers will see a more manageable renewal process. While mortgage delinquencies remain low in Canada, affected borrowers are more likely to shop around for the best rate rather than default on their loans.
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Final Thoughts on the 2025 Housing Market
Experts agree that 2025 will offer some of the most favorable borrowing conditions in recent years. With interest rates expected to continue decreasing and lenders vying for market share, Canadians will have more options when it comes to renewing or securing new mortgages. Graham advises borrowers to explore their options and make a change if their current bank doesn’t offer competitive rates.
As the Canadian housing market adjusts to these changes, the outlook for borrowers remains cautiously optimistic, with home affordability becoming a bit more realistic and mortgage options becoming more flexible in the year ahead.
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