Incoming U.S. President Donald Trump has vowed to impose 25% tariffs on all imported Canadian goods.
If he doesn't blink and Canada retaliates, some experts have pegged a potential 2025 hit to the Canadian GDP (Gross Domestic Product) of 2.5%, unemployment nearing 8.0%, and a trade-knee-jerk inflation high
(The severe economic damage wrought by the Smoot-Hawley Tariff Act of 1930 was long ago. Many thought it had ended the ‘broad tariff’ argument for good, but here we are.)
With everything going on, the potential impact of tariffs on mortgage rates will continue to evolve — check back here for the latest outlook.
So, you ask, wouldn’t higher inflation raise mortgage rates?
That's a fair question, considering the Bank of Canada's interest-rate mandate is to keep inflation in check — and we've just endured 2 years of sky-high interest rates to tame 8.0% post-pandemic inflation.
But. Tariff-induced inflation, known as 'push-cost' inflation, wouldn't necessarily require the same rate-hike solution as 'demand-pull' inflation from booming activity (as we saw after the pandemic).
There are different kinds of inflation?
More specifically, different mechanisms that can inflate inflation.
Demand-pull inflation is what we're used to, where prices rise from hotter demand while supply lacks and which the BoC fights to cool down with higher interest rates.
However, higher prices passed onto consumers due to 'artificially' higher input costs for businesses (say, from broad-slapped tariffs) are seen as push-cost inflation.
Raising interest rates to combat flourishing push-cost inflation could cause deeper economic damage and risk stagflation — an entrenched state of high inflation coupled with a weak economy and high unemployment.
Keep in mind that Canada’s economy is still in recovery mode from recent higher interest rates — and current GDP projections lack the momentum to sustain very long against the percussive pounding of all-out tariffs.
Variable mortgage rates — flexibility in uncertain 'tariff' times.
Variable mortgage rates (and those for HELOCs) float and change along with BoC interest rate movements (which inform bank prime rates).
If prime rates fall to prop up a tariff-weakened economy, variable rates could decrease further in 2025 than originally forecast (sans tariffs).
For homeowners, the result could translate into significant savings from lower mortgage payments (or reduction in amortization for those with fixed-payment variable mortgages) — a potential silver lining for those comfortable banking on the 'risk for change' posed by a variable rate choice.
Dan Eisner, founder and CEO of True North Mortgage, suggests that if 2025 turns into the Year of the Tariffs, “a variable rate could be the mortgage ace up a homeowner’s sleeve amid economic uncertainty. They can always switch to a fixed rate, penalty-free, if they get nervous."
Fixed mortgage rates — stability amid trade and economic shifts.
Unlike variable rates, fixed mortgage rates are set according to bond yields, which respond to market factors and fluctuations. This rate type isn’t directly tied to interest rate changes but anticipates where they go.
Fixed is the favourite choice of risk-averse homeowners. Many may still go with it to ride out economic volatility despite potential savings from a variable rate.
Would fixed rates drop, too? In the face of full tariffs, the 5-year fixed rate would likely be drummed down, though not right away. (Current fixed rates have priced in about 2 more prime rate cuts.)
Bond yields are usually volatile in times of uncertainty. In the short term, they could experience upside pressure at every tit-for-tat, tariff-for-tariff, to bump fixed rates around until more prime rate declines are expected.
What about no tariffs? Or somewhere in between?
Outside of trade disruption, many economists believe that interest rates are still too restrictive.
However, in the short term, due to potential trade and inflation volatility, the BoC has indicated it’s back to assessing economic readings and may need to pause its rate at 3.0%.
Core inflation is already experiencing upside pressure (like from a lowering Canadian dollar and humming U.S. economic growth). If targeted tariffs begin, the co-mingling of inflation types could complicate rate decisions until evidence of wider system stress cracks open, calling for more rate drops to support our economy.
Could interest rates rise because of tariffs?
No one’s crystal ball can answer that definitively. If the BoC sees too much immediate demand-pull inflation from disrupted supply chains, it’s not out of the question.
However, with Canada’s economy still reeling from the last rate-hike go-round — there's a much stronger case for pauses rather than hikes.
Here’s a trusted mortgage brokerage that’s been jackhammering rates for over 18 years.
Tariffs or no tariffs, wherever the economy takes us, look to the highly trained, salaried (non-commissioned) brokers at True North Mortgage to guide your mortgage decisions.
They’re straightforward about wanting to find you a better option than just caving to your big bank. Well-positioned to offer discounted rates, you’ll get free, personalized service that can help you save more in the long haul.
Anywhere you are in Canada, talk to an expert in your preferred language who cares about saving you (mortgage) cash. Contact Canada's No. 1 Mortgage Broker today.