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How U.S. Fed Rate Decisions Influence Canadian Mortgage Rates Week 4: Preparing for the Divergence Between U.S. and Canadian Interest Rates

General Derek Cole 2 Feb

However, 2024 is different—Canada has already started cutting rates, while the Fed remains cautious, leaving its rates higher for longer.

This divergence creates new opportunities and risks for Canadian mortgage borrowers. Understanding the ripple effects of differing rate paths will help homeowners and buyers make smarter financial decisions.

1. Why Is Canada Cutting Rates While the U.S. Holds Steady?

The BoC and the Fed have different priorities, despite both battling inflation over the past two years. Here’s why Canada is shifting to rate cuts while the U.S. remains on pause:

  • Higher Household Debt in Canada
    • Canadian households carry more debt than Americans, particularly in mortgages. With so many borrowers struggling to renew at higher rates, the BoC is easing pressure to prevent a major slowdown in consumer spending.
  • Weaker Economic Growth in Canada
    • Canada’s economy has shown signs of slowing more than the U.S., especially in consumer spending and real estate activity. Lower rates help stimulate demand and prevent an economic downturn.
  • The U.S. Economy Remains Stronger
    • Unlike Canada, the U.S. job market and consumer spending remain resilient. The Fed is waiting for clearer signs of a slowdown before cutting rates, fearing a potential rebound in inflation.

2. How Does This Rate Divergence Affect Canadian Borrowers?

With Canada lowering rates while the U.S. remains steady, Canadian mortgage borrowers should expect:

A. Lower Fixed Mortgage Rates

  • Fixed mortgage rates in Canada are tied to bond yields, which have already fallen in anticipation of further BoC rate cuts.
  • If the Fed keeps its rates higher, but Canada continues cutting, bond yields could remain stable or drop further, keeping fixed mortgage rates attractive.

Strategy: If you’re considering a fixed-rate mortgage, it may be wise to lock in a rate soon before further changes create volatility.

B. Variable-Rate Mortgages Will See Gradual Relief

  • BoC rate cuts will bring down prime rates, which directly impact variable-rate mortgages.
  • However, rate cuts are gradual—borrowers may see some relief, but not an immediate return to pre-2022 low rates.

Strategy: If you have a variable rate, keep an eye on BoC announcements. It may take several cuts before payments noticeably decrease.

C. Canadian Dollar Weakness Could Slow Further Rate Cuts

  • As Canada lowers rates while the U.S. holds steady, the Canadian dollar weakens relative to the U.S. dollar.
  • A weaker CAD makes imports more expensive, which could increase inflation and slow the BoC’s ability to continue cutting rates.
  • If the CAD weakens too much, the BoC may pause or slow down its rate cuts.

Strategy: Borrowers should prepare for the possibility that rate cuts could pause earlier than expected if inflation pressures rise again.

D. U.S. Economic Trends Still Matter for Canadian Borrowers

Even though the BoC is cutting rates, Canadian financial markets still react to U.S. trends:

  • If the U.S. enters a recession, the Fed may be forced to cut rates, potentially accelerating BoC cuts.
  • If the U.S. economy remains strong, Canadian banks may still adjust their mortgage rates based on global borrowing costs, even if the BoC cuts further.

Strategy: Watch for U.S. economic shifts. If inflation remains sticky in the U.S., borrowing costs in Canada may not fall as quickly as expected.

3. Should Borrowers Choose Fixed or Variable Right Now?

The BoC’s rate cuts give borrowers a decision to make:

  • Fixed Rates: These have already dropped in anticipation of further BoC cuts. If you prefer certainty, locking in now could provide stability.
  • Variable Rates: These will gradually decrease as more BoC cuts take effect. If you can handle some short-term payment fluctuations, variable may become the cheaper long-term option as rates drop further.

📌 Key Considerations:

  • If you’re renewing soon, compare current fixed vs. variable offers—some shorter-term fixed rates (1- to 3-year terms) may be attractive as rates fall.
  • If you’re in a variable-rate mortgage already, expect some relief, but budget for a gradual drop rather than immediate payment reductions.

4. Long-Term Outlook: How Far Will Rates Fall?

While Canada is cutting rates first, experts believe the U.S. will follow eventually—but later in 2024 or early 2025.

🔹 If the Fed Cuts in 2025:

  • This could accelerate Canadian rate cuts and bring mortgage rates even lower.
  • Fixed-rate borrowers may see even better offers later, making short-term fixed options attractive.

🔹 If the Fed Holds Rates High for Longer:

  • The BoC may pause its cuts earlier than expected if the CAD weakens too much.
  • Mortgage rates could stop falling, so waiting for deeper cuts could be risky.

Conclusion

Canada has started cutting rates ahead of the U.S., creating unique opportunities for mortgage borrowers. While fixed rates are already dropping, variable-rate relief will be gradual. However, the BoC must balance rate cuts with inflation risks, especially if the U.S. continues holding rates high.

📌 Key Takeaways:
✔ Fixed rates are attractive right now—lock in if you want stability.
✔ Variable rates will improve, but expect slow changes.
✔ Keep an eye on the CAD/USD exchange rate—it could affect how many more cuts we get.
✔ U.S. trends still matter—if the Fed holds rates high, Canada’s rate cuts may slow.

Next week, we’ll dive into how to time your mortgage decisions in an evolving rate environment!