Mortgage Interest Rates in Canada: Trends & What Homeowners Should Know

Mortgage rates in Canada are shaped by several economic forces — central bank policy, inflation, bond yields, housing demand, and competition among lenders.

As of 2025, Canadians are experiencing higher mortgage costs compared to the historically low-rate environment of the early 2020s.

How Mortgage Rates Are Determined

1. Bank of Canada Policy Rate
   The Bank of Canada sets the overnight policy rate, which directly influences the prime lending rate used by banks. This affects variable-rate mortgages the most.

2. Bond Yields
   Fixed-rate mortgages are tied closely to Government of Canada bond yields, particularly the 5-year bond. Rising yields generally lead to higher fixed mortgage rates.

3. Inflation and Economic Pressures
   When inflation remains above the 2% target, the central bank tightens policy, raising borrowing costs. Other factors like wage growth, housing supply, and global trade also affect inflation and mortgage rates.

4. Lender Risk and Competition
   Each lender sets rates based on borrower risk, mortgage type, and competition in the marketplace. Borrowers with stronger credit profiles typically receive lower offers.

Current Rate Levels in 2025

While exact rates vary by lender and province, the typical ranges seen in mid-2025 include:

• 5-Year Fixed Mortgage: Around 4.5% to 5.0%

• 3-Year Fixed Mortgage: Around 4.35% to 4.9%

• 1- to 2-Year Fixed Mortgage: Slightly lower than long-term options but with more frequent renewals

• Variable Mortgages: Usually tied to prime rate, which is close to 5%

These figures represent national averages and may differ depending on individual borrower circumstances.

What to Expect in 2025

• Gradual Rate Decline Expected: Many forecasts suggest the Bank of Canada may reduce rates later in 2025 and into 2026 if inflation eases.

• Higher Renewal Payments: Homeowners renewing fixed mortgages in 2025 may face significant increases compared to their previous rates.

• Shift in Borrower Preferences: More Canadians are considering shorter fixed terms or variable options, hoping to benefit from future rate cuts.

Impacts on Homeowners

1. Renewal Shock
   Many homeowners will face higher monthly payments upon renewal, with some seeing 10–20% increases compared to their last term.

2. Variable Rate Borrowers
   Those with variable mortgages could benefit from eventual rate cuts, but the risk of payment fluctuations remains.

3. Affordability Challenges
   Higher interest rates reduce the maximum mortgage amount many Canadians can qualify for, especially in expensive housing markets like Toronto and Vancouver.

4. Refinancing Considerations
   Refinancing may be less attractive unless rates drop further, as current rates remain elevated compared to those from just a few years ago.

Tips for Borrowers

• Compare Multiple Lenders: Posted rates are often higher than negotiated offers.

• Consider Fixed vs. Variable: Choose fixed for stability, variable if you expect rates to fall.

• Plan for Renewal: Budget for higher monthly payments to avoid financial strain.

• Use Mortgage Brokers: Independent brokers may find better offers tailored to your situation.

FAQ

1. Why are mortgage rates high in 2025?
Rates remain elevated due to inflationary pressures, past central bank hikes, and global economic uncertainty.

2. Will rates go down soon?
Many economists predict modest declines in late 2025 or early 2026 if inflation continues to slow.

3. Which is better, fixed or variable?
Fixed rates provide stability and predictability, while variable rates may save money if rates decline but carry more risk.

4. How much more are people paying at renewal?
Renewing homeowners in 2025 often face 10–20% higher monthly payments compared to their last mortgage term.

5. Are mortgage payments tax-deductible in Canada?
For primary residences, no. However, if the property is an investment or rental, mortgage interest may be deductible as an expense.