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Robert McLister: More people are willing to bet on interest rates because they believe the economy needs more stimulus from the Bank of Canada, a view that is consistent with the bond market outlook
Published on January 17, 2025 • Last updated 14 hours ago • 4 minutes reading time
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Detached single family homes with no lot lines in the $500,000 range in Edmonton, Alta. Photo by Rohit Group of Companies/Postmedia Files
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People are starting to take out adjustable rate mortgages again, and events in the coming weeks will either crown them geniuses or confirm their membership in the “What was I thinking?” group. Association.
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Before we explain, let's start with some data.
According to the Bank of Canada, 25 percent of mortgage buyers chose variable rates in November, just above the long-term average of 24 percent.
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That's quite a jump from the mere eight percent increase we saw during last year's lows. In early to mid-2024, interest-shocked borrowers treated variable rates like a dinner invitation from Hannibal Lecter.
But economies are cyclical and borrower tastes change. More and more people are now willing to bet on interest rates because they believe the economy needs more stimulus from the Bank of Canada. This view is in line with the bond market's forecast, which calls for two more rate cuts by the end of this year.
If you run all the numbers through a rate simulator based on current interest rates and market expectations, the variables easily crowd out the fixed terms with the lowest projected borrowing costs over a five-year period.
This is where things get interesting
The fact that more and more people believe it is safe to return to the changing waters presents an interesting scenario for 2025.
There is a certain man in Washington, DC who is throwing a wrench into all interest rate predictions.
On Monday, President-elect Trump is expected to announce tariffs on Canadian goods, which could roil interest rate markets.
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“A high and comprehensive tariff on Canadian exports would likely plunge the economy into recession and force the Bank of Canada to cut interest rates more aggressively than it otherwise would have,” said Royce Mendes, managing director and head of macro strategy at Desjardins.
That would put variable rate takers on the right side of the bet, as the prime rate could fall another 100 to 150 basis points. Even bond yields, the puppets of fixed mortgage rates, could fall if they take into account a lower Bank of Canada base rate.
But if markets view tariffs as fuel for inflation rockets, five-year bond yields could skyrocket faster than an elevator in the CN Tower. And the Bank of Canada might have to raise interest rates despite the economic damage. This is the nightmare scenario called stagflation, where our economy goes to the toilet while prices celebrate like it's 1979.
Without widespread retaliation, tariffs could also prove to be smaller and less effective, which markets are currently expecting, Mendes said. In this case, Canada could ultimately overcome the trade conflict without a dramatic impact on mortgage rates.
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Mortgage features are important
For those who are betting on the economic downturn but want to sleep easier, fixed-payment variable interest rates offer a middle ground.
They allow interest rates to fluctuate, but your payment is fixed. Most banks only increase variable payments when interest rates rise so much that you can't even cover the interest due. This gives variable rate borrowers some interest rate protection, even if the Bank of Canada suddenly has to accept interest rates a few percentage points higher.
However, some banks offer more payment protection than others. For example, the Bank of Montreal and the Canadian Imperial Bank of Commerce do not have the same payment increase policies as the others. With them you are better protected against significant interest rate increases during your term.
However, banks still expect you to repay your mortgage as agreed. Any interest and principal that you didn't pay while your variable payments were frozen will effectively require catch-up payments at renewal.
This means variable rate borrowers are at risk of experiencing significant payment spikes upon renewal, and that's exactly what's happening across the country right now.
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Borrowers with fixed payments at least have the opportunity to plan for these peaks in advance. Many people who renew today are extending their repayments to accommodate higher payments. Fixed payments also provide time for income to rise a bit before renewal payments skyrocket.
By the way, if you strongly believe that interest rates will go down and you want your adjustable rate mortgage payment to go down too, the mortgage you want is called an adjustable rate mortgage. Mortgage brokers have the best selection of these loans, but you can also get them directly from lenders like Bank of Nova Scotia and National Bank of Canada.
Strap yourself in and experience exciting rates
Markets and economists generally expect Canada's key interest rate to fall, tariffs or not. The questions are: by how much and for how long?
The latest interest rate expectations tracked by CanDeal DNA suggest that rates could bottom this summer following further 50 basis point easing from the Bank of Canada.
Meanwhile, some banks – such as the National Bank – are forecasting interest rate increases in 2026.
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For now, hold on to all of these thoughts until the end of next week, because President Trump will have something to say about it. And if you still want to let your interest rate fluctuate – and prefer some payment protection – consider asking for fixed payments. Then have the lender or mortgage broker explain exactly how much a rate increase would trigger a payment reset.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
Mortgage interest rates
The interest rates shown below are updated at the end of each day and come from MortgageLogic.news' Canadian Mortgage Rate Survey. Postmedia and imagination. Online Inc., parent company of MortgageLogic.news, will be compensated by certain mortgage providers if you click on their links in the charts.
This table reflects prevailing interest rates at the time of publication of this story. For the best mortgage rates in Canada today, click here.
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