Happy Holidays
December 22, 2025
Welcome back.
We begin 2026 waiting for the other shoe to drop.
Both the Canadian and US economies fared surprisingly well in the second half of 2025 despite tariff headwinds. But stronger-than-expected economic headlines have been tempered by the more detailed economic data from which they are derived.
For example, our GDP prints have been robust, but largely because reduced imports relative to our exports have altered our trade mix. Our governments have accounted for most of the incremental spending increases, while businesses have kept their sails trim and consumers have treaded water by drawing down savings and adding debt.
Job creation has been resilient, but most of the newly created jobs are part-time and lower paying. Average wage growth has outpaced inflation, but consumer and business confidence levels have flagged nonetheless.
The recession that many (including this blogger) predicted after Trump’s tariffs were announced hasn’t materialised to this point, but most forecasters still see storm clouds on the horizon.
Most of the borrowers I am currently working with share that general assessment of conditions. They expect mortgage rates to be pulled lower as our economic momentum wanes. But while that has typically happened in the past, recent bond-yield movements offer a warning that our interest-rate cycle may play out differently.
When their economies slow, the Bank of Canada (BoC) and the US Federal Reserve will typically cut their policy rates to stimulate demand to help offset that weakness. Both central banks have already made significant cuts this time around, and there is still room for more if needed.
If the BoC enacts more rate cuts, Canadian mortgage borrowers with variable mortgage rates will see their rates drop by the same amount in short order. But most Canadians prefer fixed-rate mortgages, and these are not directly tied to the BoC’s policy-rate changes.
Our fixed mortgage rates are priced on Government of Canada (GoC) bond yields, and their movements have about a 90% correlation with the movements of their US Treasury equivalents. The gravitational pull of US Treasuries is the key detail that may send Canadian fixed mortgage rates higher even if our economy weakens further from here.
Historically, when the Fed cuts its policy rate, US Treasury yields have declined. Bond-market investors respond to the same factors that caused the Fed to cut. That has included some combination of waning overall momentum, softening labour-market conditions, and reduced inflation pressure.
But this time around, the Fed is cutting when US inflation is still above target and rising, in large part because of rampant deficit spending by the US federal government that shows no signs of abating.
Economist David Rosenberg recently observed that for the first time in US history, the benchmark 10-yr US Treasury yield has risen alongside the Fed cuts. He noted that historically, Fed rate cuts of 1.75% have coincided with an average drop of 0.40% in the 10-yr Treasury yield. This time around, that same reduction in the Fed’s policy rate has coincided with a 0.50% increase in the 10-yr Treasury yield.
This unprecedented response from US bond-market investors confirms their belief that the Fed’s rate cuts are ill-advised and will stoke additional inflation.
Interestingly, US Treasury-yield movements have a much greater impact on US borrowing costs than the Fed’s policy rate does, so at this point, those cuts are doing more harm than good (on both sides of the 49th parallel).
The Latest on Mortgage Rates
Government of Canada (GoC) bond yields remained range bound to finish out the year.
For the time being, there is no immediate pressure on our fixed mortgage rates, in either direction. But as explained above, mortgage borrowers would be wise to question the popular (and historically accurate) narrative that weakening economic momentum will necessarily lead to lower fixed rates.
I expect our fixed mortgage rates to retain their upward bias over the early part of 2026.
Variable mortgage rate discounts were unchanged over the holidays.
The BoC isn’t expecting to move its policy rate soon. It will instead wait for an “accumulation of evidence” to confirm how our economy is responding to trade uncertainty.
That said, the Bank’s communications have leaned to the dovish side of late, and that bolsters my belief that its next (eventual) move will be a cut.
Insider’s Tip for Borrowers
Lenders apply sliding-scale policies to cut back the maximum mortgage amounts they will offer on high-value properties.
This post explains how sliding scales work. (Important note: lender sliding-scale policies can vary widely from lender to lender.)
My Take on Today’s Mortgage Options
Fixed rates are currently offered at about their long-term average levels. Three- and five-year fixed rates are the most popular choices.
The premium that borrowers must pay to add additional years to their fixed-rate term has been increasing and will probably continue to do so. For as long as the spread between three- and five-year fixed rates remains minimal, I think the five-year fixed-rate term offers slightly better value.
I still expect today’s variable mortgage rates to produce the lowest borrowing cost over their full terms (even though additional BoC rate cuts don’t appear likely over the near term).
Anyone choosing a variable rate should do so only if they can live with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments) should my assessment prove incorrect.
Three Posts Every New Visitor to My Blog Should Read
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages.
This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender. A lower penalty can save borrowers thousands of dollars if rates drop.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract.
