People walks past a for sale sign in Vancouver.Paige Taylor White/The Globe and Mail
A trade war between Canada and the U.S. over tariffs was temporarily averted this week but the mortgage market reacted immediately with five-year fixed rates falling to 2½-year lows.
Given that the uncertainty is far from over, here’s what to keep in mind if you’re shopping for a new mortgage rate, or coming up for renewal on your current term.
Bond yields, and fixed mortgage rates, have dropped
Stock markets tumbled on Monday morning, with investors spooked by U.S. President Donald Trump’s newly signed executive order that paved the way for a trade war. Bond yields plunged, as investors piled into “safe haven” investments. This pushed bond prices higher and caused yields – which move inversely to prices – to fall to lows not seen since early 2022. The Government of Canada five-year bond yield started Monday morning in the 2.5-per-cent range, which put huge downward pressure on fixed mortgage rates.
Lenders were quick to price in discounts. By Tuesday, the lowest five-year fixed term in Canada was slashed to 3.89 per cent. This is the lowest this rate has been since the summer of 2022, and marks only the second time since then that borrowers have seen a five-year fixed rate that starts with a three.
The question now is, how long will fixed mortgage rates stay this low? Monday’s market slump was short-lived; both stock and bond prices began to stabilize once word came through of a 30-day tariff delay for Mexico, and gained further once the same was confirmed for Canada. That same five-year yield had recovered to the 2.6-per-cent range by the end of the day, and continued to hover there on Thursday.
However, while investors are cheered by the possibility that tariffs may be negotiated away, they’re still pricing in plenty of uncertainty, which will keep yields on the lower side. The five-year yield remains 10 to 15 basis points below where it sat just last week and roughly 60 basis points below its mid-January peak of 3.28 per cent. Employment numbers, due out on Friday for both Canada and the U.S., could also cause a new round of yield volatility in either direction.
The advice here for mortgage rate shoppers is to waste no time taking out a preapproval and rate hold. This will guarantee access to the lowest rate available today, up to 120 days, even if bond yields and rates move higher in the short term.
Lower variable rates are coming – but we don’t know by how much
Tariffs could also force the Bank of Canada (BoC) to cut its benchmark rate by more than expected.
Canada’s two-year bond yield, which is considered the most sensitive to central bank moves and used as a forward-looking tool, also dropped by 20 basis points to a three-year low on Monday to the 2.45-per-cent range, inching up since to around 2.58 per cent.
A tariff scenario would prompt the BoC to slash its policy rate by a quarter-point in each of its upcoming meetings until October, according to analysis from Bank of Montreal chief economist and managing director of economics Douglas Porter. It was written on Sunday, but still outlines the most likely outcome if the U.S. implements 25-per-cent tariffs across the board.
“Previously, we projected the Bank would cut the policy rate two more times this cycle, by 25 [basis points] in April and July (ending at 2.50 per cent),” he writes. “We now look for the quarter-point pace to continue each meeting until October, thus ending at 1.50 per cent.”
If that scenario comes true, it could result in variable mortgage rates in the 2.7-per-cent range. Sticking with the non-tariff scenario of two more rate cuts would leave variable-rate offerings to one percentage point higher, in the 3.7-per-cent range.
What is certain, is the promise of lower variable rates – with or without the influence of tariffs – has renewed borrower appetite.
At our brokerage, clients asking for a variable rate now make up roughly half of all incoming inquiries – much higher than in December, when shorter-term fixed mortgages, such as three-year terms, were king. These still provide a good middle ground for those who want to avoid short-term volatility, while five-year terms are the rate of choice for more nervous borrowers.
Of course, the caveat with a variable mortgage rate is gauging risk tolerance. Economic uncertainty makes the central bank just as prone to future hikes, especially if it needs to undo the effects of tariff-induced stagflation – when inflation rises without accompanying economic growth.
If tariffs cause the Bank of Canada to cut aggressively while also fuelling inflation, the central bank will need to pay the same piper eventually with rate hikes – an inevitability that variable borrowers should keep in mind.
Penelope Graham is the director of content at Ratehub.ca.
