Rumblings of economic turbulence are echoing across the Canadian border as U.S. President Donald Trump prepares to impose 25% tariffs on all imported Canadian goods, with serious ramifications anticipated for Canadian households. While these tariffs aim to address the trade deficit between the nations, the consequences could ripple through the mortgage market, influencing rates and economic stability.
This trade development arrives at a time when the Canadian economy is already grappling with high inflation, which recently soared to around 8%. With economic analysts warning of significant setbacks, the Canadian Mortgage and Housing Corporation (CMHC) has issued dire predictions. If these tariffs go through, it could result in Canada's GDP suffering as much as 2.5% by 2025, alongside unemployment rates potentially nearing 8%. Such sweeping changes raise questions about how forthcoming tariffs might affect how Canadians refinance loans or secure mortgages.
Tariffs threaten not only increased costs for consumers but also the foundational structures of the mortgage market. Industry experts point to two distinct mechanisms of inflation at play: the 'push-cost' inflation sparked by tariffs and 'demand-pull' inflation driven by consumer demand. While both lead to rising prices, they require different monetary policies, presentation of concerns for the Bank of Canada (BoC). One financial expert captured this complexity: "...the potential impact of tariffs on mortgage rates will continue to evolve," underscoring the unpredictable nature of this economic climate.
The Tariff-induced pressure on prices can lead to heightened inflation, which typically would incite the Bank of Canada to raise interest rates to stabilize the economy. Yet, the response may be different for push-cost inflation caused by tariffs; raising rates could plunge the economy back toward stagflation—a combination of high inflation and economic stagnation. The delicate balance of managing economic growth against inflationary pressures is becoming increasingly challenging for the BoC.
With uncertainty swirling around the Canadian dollar and the cost of imports, the BoC could find itself compelled to reconsider its current policy objectives. This uncertainty looms particularly large over the mortgage market. Many Canadians are already facing affordability concerns—predicted increases from tariffs, which are estimated to add $1,900 per year to the average family’s costs, add to the stress on household budgets.
Anticipation is building around how the upcoming policy meetings will address these fluctuations, especially with many predicting cuts to the BoC's rate, which currently sits at 3%. With interest rate adjustments on the table, especially some predicting it could drop to as low as 1.5%, borrowers might expect short-term relief.
Homeowners considering variable mortgage rates can take heart from this confluence of events. Unlike fixed rates, which respond to market volatility indirectly, variable rates tend to reflect immediate changes made by the BoC. Dan Eisner, CEO of True North Mortgage, suggests, "...a variable rate could be the mortgage ace up a homeowner’s sleeve amid economic uncertainty." This means borrowers can enjoy significant savings on lower rates if the central bank takes the necessary step to adjust downwards.
Yet, homeowners inclined to pursue fixed-rate mortgages are not without options. Bond yields—an influential factor for fixed mortgage rates—have recently dropped to lows not observed since April 2022, encouraging more competitive mortgage offerings. Fixed-rate mortgages provide stability amid constant economic changes, appealing to those unprepared for fluctuated payments. The question remains, will fixed rates lower as more tariffs activate? Ongoing market chatter speculates the answer could be yes.
All indicators point to the expectation of forthcoming cuts; money markets anticipate reductions of 75 basis points. Fixed rates likely incorporate this outlook as pricing reflective of potential rate cuts are already observed. Interestingly, both experts and market analysts agree consumers must closely monitor developments and be prepared to shake up their mortgage strategies based on the ever-evolving tariff climate.
While Trump’s delay on tariff enforcements may provide temporary respite, it offers little assurance. Economic predictions remain clouded with doubt and potential instability. The looming finalization of tariffs can mean altered financial landscapes for Canadian homeowners, urging them toward proactive mortgage planning.
For now, Canadian mortgage borrowers are encouraged to monitor the situation closely, evaluate their options, and prepare for the unpredictability of rates influenced by international trade relationships. This changing reality may push rates lower but equally may prompt swift increases due to raised inflationary pressures—the very nature of preparation becomes critically important.