How Recent Rate Changes, U.S. Tariffs Impact Canada’s Mortgage Industry

 Reza Ghazi Forbes Councils Member

 Forbes Finance Council COUNCIL POST

CEO of GreenFlow Financial Corp., overseeing the company’s operations and growth strategies.

On March 12, the Bank of Canada announced a policy interest rate decrease from 3% to 2.75%. This comes just a month and a half since it lowered rates from 3.25% to 3%.

Inflation has risen so far in 2025 and is up to 2.6% as of February, according to the consumer price index, which measures inflation in Canada. This is up from 1.9% the previous month.

Policy rate changes influence several sectors of the Canadian economy, including the mortgage industry. Additionally, the industry is feeling the impact of recent tariff decisions from the U.S. Let’s take a look at how these developments may affect mortgages.

Impact of Rate Changes on Mortgage Industry

When the policy rate decreases, variable-rate mortgage interest rates follow suit. The exact impact depends on the type of variable-rate mortgage consumers have. If they have a fixed-payment variable rate (meaning the payment stays constant throughout the term but the amount that goes to interest varies with rate changes), more of the monthly mortgage payment will go to the principal instead of interest when rates decrease. Those with variable-payment mortgages (meaning actual payments vary with rate changes) see monthly payments immediately become lower when the policy rate decreases.

However, policy rate decreases don’t directly impact fixed-rate mortgages, as those rates are generally associated with bond yields as opposed to the policy rate. Policy rate changes, though, can affect the bond market, indirectly impacting fixed mortgage rates.

Impact of U.S. Tariffs on Canadian Mortgages

The U.S. proposed 25% tariffs on goods exported from Canada, which went into effect in early March, and Canada implemented retaliatory tariffs simultaneously with additional retaliatory tariffs scheduled for later.

The trade war and associated tariffs on both sides of the border are expected to result in inflationary pressure, increasing prices as well as potential layoffs/unemployment. These effects would mean lower disposable income in the hands of Canadians and, consequently, lower demand for housing, likely resulting in stagnant or lower housing prices.

Some expect the Bank of Canada to reduce rates further in 2025 to offset this outcome, which would reduce variable rates and the cost of borrowing as a result. As mentioned earlier, while fixed rates are not directly impacted by the Bank of Canada rate changes, when consumer confidence falters, investors tend to move to purchase safer investments such as bonds, which result in lower bond yields and therefore lower fixed rates.

Whether the Bank of Canada rate policy measures will be enough to offset the uncertainty in the market as a result of the tariffs remains to be seen. With over 2 million mortgages coming up for renewal in 2025 and 2026, further rate reductions would help reduce the impact on real estate borrowers as they navigate these renewals, especially in an uncertain environment, and provide potential opportunities for existing mortgage holders to investigate whether refinancing into a lower rate mortgage is an option for them. The possibility of lower real estate prices, along with lower mortgage rates, could also present an opportunity for first-time buyers to enter the market.

Alternative Mortgage Products In An Uncertain Market

With uncertainty in the market related to the impact of the trade war with the U.S., it is worth noting that there are alternative as well as private mortgage products, which offer a solution for borrowers who are not able to qualify for a traditional mortgage whether due to fluctuating income or other financial constraints.

For example, many alternative lenders and some private lenders as well offer a home equity line of credit (HELOC), which allows consumers to borrow from 65% to 80% of the appraised value of their property, providing either limited or in some cases even no income documentation. Monthly payment requirements can vary but many, like a traditional HELOC, require interest-only payments on the monthly outstanding balance.

However, whereas a HELOC at a traditional financial institution has a rate in the prime +0.5% or 1% range, these HELOC rates are higher, ranging from the mid 7% up to over 12% for a second mortgage with a setup fee and annual maintenance fee. Nonetheless, these rates are still much lower than credit card interest rates, and these products can provide an opportunity for borrowers to consolidate higher-interest debt into a fully open line of credit, or provide business owners who don’t otherwise qualify for a secured line of credit, with access to funds when needed.

Other private lenders have established products that are designed to assist consumers who are experiencing temporary hardship by providing temporary payment relief with optional payments or products designed to help business owners who are unable to provide proof of their income. These products provide consumers with more options to help those experiencing temporary hardships, and many are also aimed at helping business owners, self-employed individuals and those with unique financial and income situations who traditionally have difficulty being approved for a mortgage or obtaining standard second mortgages, which are more costly.

As the next few months unfold, if the U.S. tariffs and retaliatory Canadian tariffs remain, I expect mortgage rates to continue to be reduced in the Bank of Canada’s effort to offset the effects, and the actual impact on the economy and the markets will be seen. On the upside, lower mortgage rates would translate to lower interest costs for those with high-interest mortgages and could be a step forward in the light of affordability for those looking to enter the real estate market.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation