On Wednesday, the Bank of Canada cut its overnight rate by another 50 basis points (0.5%). This is the second oversized rate cut in a row and has now moved the overnight rate from 5% in June to 3.25% today.

 

There are a lot of reasons for the Bank of Canada to cut 50 basis points. Rising unemployment, uncertainty over US tariffs, and slow economic growth would each justify a 50bps cut on their own. However, an even more concerning storm on the horizon is the rollover of 5-year fixed mortgages that were issued starting in April of 2020 during the pandemic.

 

Many mortgages that were issued after March of 2020 were done so at record-low interest rates (with the volume-weighted average below 2% for multiple months¹). These incredibly low mortgage rates stayed in place for almost all of 2020 and some of 2021, which coincided closely with the peak of housing prices in Canada. It's important to understand that the majority of mortgages issued in Canada are done on a 5-year fixed rate. This means that, as we come into March 2025 and beyond, those 5-year fixed mortgages with record-low rates are starting to come up for renewal. The only problem is current mortgage rates in Canada are now close to 5%, which means the interest portion of the new payments will possibly be more than double what people were paying at the start of the pandemic.

 

You don't have to be a rocket scientist to figure out that many people will not be able to afford to pay twice their interest rate on housing costs. The Bank of Canada has two potential options: 1) Cut rates so they are at a level that people can afford, or 2) Let the market bear the rates and potentially have a housing crisis – which could hurt the economy even more. Just to add more fuel to the fire, you can see from the chart below that next year is one of the larger renewal years that we have seen in some time.

 

Rates have come down hard and fast, and anyway you look at it appears this trend could continue for the foreseeable future. Maybe next week I will talk about how this affects the Canadian dollar!!

 

I have also included a note from our CIBC Economics team entitled “Everybody, (Donald’s Back Alright)”

 

As always, if you have any questions, please feel free to give us a call.

 

Have a great weekend.

 

Milan