“Historic drop,” “favorable impact,” and “series of cuts” are phrases used by the Bank of Canada in its recent announcements about lowering the key interest rate, which sets a positive tone for 2025! But why is this good news so important for you and your mortgage payments?
Financial jargon can often be confusing if you’re not familiar with it. So, let’s take a moment to clarify how interest rates affect mortgage payments, particularly yours. Here’s a quick refresher.
Mortgage interest rates 101
Key interest rates, mortgage payments, and inflation: are they a winning combination? The answer depends on the state of our economy, particularly inflation levels. From 2022 to 2024, inflation was a hot topic, reaching troubling highs during that time. However, since June 2024, the trend has been downward, resulting in a decrease in the key interest rate from 5% to 3.25% by December 2024—a year-end gift that was much appreciated! The key interest rate directly influences mortgage interest rates, which in turn affect mortgage payments. How exactly? Let’s take a closer look.
In Canada, mortgages can have either variable rates, which fluctuate throughout the term based on market conditions, or fixed rates, which remain constant for the entire term. Depending on these factors and the payment terms, the impact of interest rate changes can manifest in three different ways:
- Variable-rate mortgages with adjustable payments: Mortgage payments go up or down based on changes in interest rates.
- Variable-rate mortgages with fixed payments: When rates rise, a larger portion of the payment goes toward interest, reducing the principal repayment.
- Fixed-rate mortgages: The effects of interest rate changes are only experienced at the time of renewal. In 2024 and 2025, about 2.2 million mortgages (45% of all in Canada) will face a rate shock upon renewal.
So, if mortgage interest rates rise, the consequences can be significant:
- Higher monthly payments: For example, on a $500,000 mortgage, an increase from 3% to 4% would add about $264 per month.
- Reduced borrowing power: New buyers may find that they can borrow less because the overall financing costs have increased.
- Trigger point risk: For variable-rate mortgages that have fixed payments, if interest rates rise significantly, the payments may only cover the interest, leaving the principal unpaid.
- Extended amortization period: If monthly payments remain unchanged despite rising rates, the length of the mortgage term may extend.
If rates go down, as you can guess, the impacts are much more positive!
- Variable-rate mortgages with adjustable payments: Monthly payments drop immediately.
- Variable-rate mortgages with fixed payments: The payment stays the same, but more of it goes toward the principal.
- Mortgage repayment speeds up, reducing total interest paid over time.
- Fixed-rate mortgages: The impact isn’t immediate, but you can secure better rates at renewal or refinancing.
- New buyers: Borrowing power increases since financing costs are lower.
With these basics in mind, how should we interpret this much-anticipated rate cut and its consequences for the year ahead?
Mortgage rates in 2025: A wide gap among homeowners
The Bank of Canada’s decision to cut the key interest rate in late 2024 had a significant impact on the financial and real estate markets. This is excellent news for many new buyers and homeowners.
New buyers will benefit from lower loan rates, making it more affordable to purchase their first property. That’s why, for many, the dream of buying a home became a reality in the fall, which helps explain the substantial rebound in real estate activity throughout 2024.
Experts point to several figures to illustrate this trend. For instance, a variable rate of 5.35% is expected to drop to 4.85% following the cut. Another concrete example comes from Serge Lessard, Director of Brokerage Operations at Nesto, who told Le Devoir: “For a $400,000 mortgage amortized over 25 years, the payment should drop from about $2,420 to $2,300 per month.” For homeowners who purchased less than five years ago, 2025 should indeed be a very good year.
On the other hand, as mentioned earlier, those who purchased more than five years ago may face higher rates when renewing. Why? Because their initial rates were very low (around 2–3%) before the sharp increases of 2022–2023.
That being said, every situation is unique and depends on the timing of the purchase, the type of mortgage, and the specific market conditions at that moment.
Do you need a clear picture of today’s real estate market and your options? Contact the D’Astous Cloutier Team—they’ll be there for you with transparency, attentiveness, and dedication.
