3 Reasons Canadian Mortgage Rates Will Never Hit 5%

Anita Groves • October 24, 2017

Canadian regulators may soon force borrowers to qualify at interest rates two percentage points above the contract rate.

With many posted mortgage rates now approaching and even surpassing 3.00% (depending on the term), this means borrowers will soon need to show they can afford payments based on rates of 5.00%+.

The justification is that regulators want Canadians to be prepared when interest rates rise, but that’s a hollow excuse. It’s a punitive macroprudential rule that is disconnected from reality.

Interest rates can only rise if inflation accelerates, but every force in the world is pushing in the other direction. We’re in an age of no inflation and it will completely change borrowing, lending and how the mortgage market works.

Here are three reasons you will never have to pay 5.00% on a typical 5-year fixed mortgage, but why you could be paying more in other ways:

1) There Is No Inflation

There is only one kind of inflation that matters to the Bank of Canada: wage inflation. Prices might rise on everything for a year or two, but if wages don’t go higher with them, the cycle hits a wall because people won’t have the money to pay those higher prices. Demand falters and prices flatten.

The classic wage-price spiral of the ‘70s and ‘80s will never return and here’s why:

The simple Economics 101 model is supply and demand. As the economy grows and companies expand, the supply of idle workers eventually runs out. That means more bargaining power for workers and wages rise. It’s something the Bank of Canada calls the “output gap” or “slack”.

This paradigm is now forever broken. The first reason why is that globalization means the supply of workers is no longer limited to where you are. Factories and many service industries can move to where workers are cheapest, and until there are jobs for the billions of workers on the planet there will always be slack.

Even if all those workers could find jobs it still wouldn’t matter because automation is a far bigger driver of disinflation. Workers everywhere are being replaced by technology. It’s not just robots, but also computers, algorithms and improved processes adopted from abroad. We are still in the very early stages of this change and it’s accelerating daily.

Add in de-unionization, Amazon-style competition, precarious labour, other technology and the lingering collective psychological shock of the financial crisis and it’s a Quantitative Easing-miracle that prices haven’t fallen already.

This isn’t just a Canadian phenomenon. It’s not even a developed market phenomenon; inflation is low virtually everywhere. Even emerging markets that are growing far faster than Canada’s economy aren’t generating runaway inflation.

China’s economy continues to grow at a nearly 7% annually, but inflation is just 1.8% and has been below 3% for four years. Average mortgage rates for homebuyers there remain under 5.00%, and until rules were tightened this year, borrowers were typically paying less than 4.00%.

2) The Pain Would be Catastrophic

The second reason that rates will never rise to beyond 5.00% in Canada is that there are now far too many people who wouldn’t be able to make their payments. The government’s last round of new mortgage rules was a noble effort to reign in the housing market, but the horse has already left the million-dollar barn. Many borrowers would be forced to sell their homes, and those who could afford to stay would have their spending power cut dramatically.

A two-percentage-point rate increase on a $500,000-mortgage boosts the payment by at least $500 per month. A 5.00% rate on a million-dollar mortgage means $50,000 spent per year in interest alone. That’s a devastating bite out of a household’s disposable income, which is crucial for sustaining the economy.

Canada is often described as a resource economy, but it’s far more dependent on the health of the consumer than the price of oil. If consumers begin to suffer, it will quickly show up in the economic data and the Bank of Canada would be forced to do a quick U-turn on rates.

Even if Canadians could afford those higher rates, it would be a disaster politically for any governing party. Making people feel poorer is a sure-fire way to find yourself voted out of Parliament.

3) Rules Are the New Rates

While there is no inflation in the classic sense, prices are rising. You don’t need to look any further than soaring real estate or sizzling global stock markets.

The crux is that there are two types of inflation. There’s the classic consumer inflation, which is tied to industrial, commercial and labour prices that are doomed to stay low forever.

Then there is asset-price inflation. Low rates have changed the economics of borrowing and investing. If you can borrow at 3.00%, virtually anything that returns more than that is a viable investment. So asset prices rise until even meagre returns are no longer economical. Add in scarcity, tighter land-use rules, foreign capital and the growing desire to live in urban centres and it’s a perfect storm for housing.

Ultimately, this is a big political problem. People want to live in cities and it’s unpopular for voters to be spending all their money on mortgage payments. It’s also bad for business to have workers commuting unreasonable distances.

There are two real solutions and two that governments will try first.

The ultimate solution to high house prices is to make it easier and cheaper to build more housing. That’s politically unpopular now but could change someday. For now, governments continue to make it tougher to build the homes people want at prices they can afford.

The other way to cool house prices is to raise interest rates, however that’s far too blunt of a tool. Forcing businesses or rural homeowners to borrow at higher rates would be an unnecessary blow. The Bank of Canada has already gone too far.

The two solutions governments are trying first are the two things they always do in a market crisis: blame foreigners and blame the speculators.

So far the execution has been sloppy, but politicians have sent a powerful signal that they are now part of the equation. So don’t worry about interest rates, worry about what’s coming from regulators.

This article was written by Adam Button , Chief Currency Analyst and Managing Editor of ForexLive.com , one of the most-visited sites for foreign exchange news and analysis. It was originally posted here.

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Anita Groves

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Bank of Canada Rate Announcement Jun 4th, 2025

By Anita Groves • June 4, 2025

Bank of Canada holds policy rate at 2¾%. FOR IMMEDIATE RELEASE Media Relations Ottawa, Ontario June 4, 2025 The Bank of Canada today maintained its target for the overnight rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%. Since the April Monetary Policy Report, the US administration has continued to increase and decrease various tariffs. China and the United States have stepped back from extremely high tariffs and bilateral trade negotiations have begun with a number of countries. However, the outcomes of these negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened. Uncertainty remains high. While the global economy has shown resilience in recent months, this partly reflects a temporary surge in activity to get ahead of tariffs. In the United States, domestic demand remained relatively strong but higher imports pulled down first-quarter GDP. US inflation has ticked down but remains above 2%, with the price effects of tariffs still to come. In Europe, economic growth has been supported by exports, while defence spending is set to increase. China’s economy has slowed as the effects of past fiscal support fade. More recently, high tariffs have begun to curtail Chinese exports to the US. Since the financial market turmoil in April, risk assets have largely recovered and volatility has diminished, although markets remain sensitive to US policy announcements. Oil prices have fluctuated but remain close to their levels at the time of the April MPR. In Canada, economic growth in the first quarter came in at 2.2%, slightly stronger than the Bank had forecast, while the composition of GDP growth was largely as expected. The pull-forward of exports to the United States and inventory accumulation boosted activity, with final domestic demand roughly flat. Strong spending on machinery and equipment held up growth in business investment by more than expected. Consumption slowed from its very strong fourth-quarter pace, but continued to grow despite a large drop in consumer confidence. Housing activity was down, driven by a sharp contraction in resales. Government spending also declined. The labour market has weakened, particularly in trade-intensive sectors, and unemployment has risen to 6.9%. The economy is expected to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued. CPI inflation eased to 1.7% in April, as the elimination of the federal consumer carbon tax reduced inflation by 0.6 percentage points. Excluding taxes, inflation rose 2.3% in April, slightly stronger than the Bank had expected. The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up. Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving. With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts. We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Governing Council is proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve. We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled. Information note The next scheduled date for announcing the overnight rate target is July 30, 2025. The Bank will publish its next MPR at the same time.

How Employment Status Impacts Your Mortgage Application

By Anita Groves • May 28, 2025

Chances are if you’re applying for a mortgage, you feel confident about the state of your current employment or your ability to find a similar position if you need to. However, your actual employment status probably means more to the lender than you might think. You see, to a lender, your employment status is a strong indicator of your employer’s commitment to your continued employment. So, regardless of how you feel about your position, it’s what can be proven on paper that matters most. Let’s walk through some of the common ways lenders can look at employment status. Permanent Employment The gold star of employment. If your employer has made you a permanent employee, it means that your position is as secure as any position can be. When a lender sees permanent status (passed probation), it gives them the confidence that you’re valuable to the company and that they can rely on your income. Probationary Period Despite the quality of your job, if you’ve only been with the company for a short while, you’ll be required to prove that you’ve passed any probationary period. Although most probationary periods are typically 3-6 months, they can be longer. You might now even be aware that you’re under probation. The lender will want to make sure that you’re not under a probationary period because your employment can be terminated without any cause while under probation. Once you’ve made it through your initial evaluation, the lender will be more confident in your employment status. Now, it’s not the length of time with the employer that the lender is scrutinizing; instead, it’s the status of your probation. So if you’ve only been with a company for one month, but you’ve been working with them as a contractor for a few years, and they’re willing to waive the probationary period based on a previous relationship, that should give the lender all the confidence they need. We’ll have to get that documented. Parental Leave Suppose you’re currently on, planning to be on, or just about to be done a parental leave, regardless of the income you’re now collecting, as long as you have an employment letter that outlines your guaranteed return to work position (and date). In that case, you can use your return to work income to qualify on your mortgage application. It’s not the parental leave that the lender has issues with; it’s the ability you have to return to the position you left. Term Contracts Term contracts are hands down the most ambiguous and misunderstood employment status as it’s usually well-qualified and educated individuals who are working excellent jobs with no documented proof of future employment. A term contract indicates that you have a start date and an end date, and you are paid a specific amount for that specified amount of time. Unfortunately, the lack of stability here is not a lot for a lender to go on when evaluating your long-term ability to repay your mortgage. So to qualify income on a term contract, you want to establish the income you’ve received for at least two years. However, sometimes lenders like to see that your contract has been renewed at least once before considering it as income towards your mortgage application. In summary If you’ve recently changed jobs or are thinking about making a career change, and qualifying for a mortgage is on the horizon, or if you have any questions at all, please connect anytime. We can work through the details together and make sure you have a plan in place. It would be a pleasure to work with you!