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The 2025 Rate Cut Cycle & Its Impact on Borrowers – Week 1: Why Is the Bank of Canada Cutting Rates While the U.S. Holds Steady?

General Derek Cole 9 Feb

The Bank of Canada (BoC) has officially entered a rate-cut cycle—a long-awaited shift after years of aggressive rate hikes. Meanwhile, the U.S. Federal Reserve (Fed) is holding firm, keeping rates high for longer.

This divergence between Canadian and U.S. monetary policy raises key questions:

  • Why is Canada cutting rates while the U.S. isn’t?
  • How far and how fast will rates fall in 2025?
  • What does this mean for mortgage borrowers?

Understanding these shifts will help homeowners, buyers, and investors make informed financial decisions heading into 2025.

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

A. Canadian Households Are More Sensitive to Rate Hikes

  • The typical U.S. mortgage is 30 years fixed, meaning Americans haven’t felt the pain of rate hikes the way Canadians have.
  • In Canada, most mortgages renew every 5 years or sooner, meaning millions of homeowners are now renewing at much higher rates.
  • BoC’s Concern: Keeping rates too high for too long could trigger a wave of financial hardship, mortgage defaults, and reduced consumer spending.

📉 Bottom Line: The BoC is easing rates to help highly indebted households avoid financial distress.

B. Canada’s Economy Is Slowing Faster Than the U.S.

  • Canada’s GDP growth has stalled, and unemployment is rising.
  • In contrast, the U.S. economy remains strong, with steady job growth and consumer spending.
  • If the BoC keeps rates too high for too long, Canada risks slipping into a recession in 2025.

📉 Bottom Line: The BoC is lowering rates to prevent an economic downturn.

C. Inflation Is Under Control in Canada—But Still Sticky in the U.S.

  • Canadian inflation has cooled faster than U.S. inflation, nearing the BoC’s 2% target.
  • Meanwhile, U.S. inflation remains higher, forcing the Fed to keep rates elevated.
  • If the BoC waits too long to cut rates, Canadian borrowers may suffer unnecessarily.

📉 Bottom Line: The BoC has room to cut rates without reigniting inflation.

2. What Does This Mean for Mortgage Borrowers?

With the BoC now in rate-cut mode, how will this impact mortgage holders?

A. Fixed-Rate Mortgages: Rates Will Likely Keep Dropping

  • Fixed mortgage rates have already fallen in response to lower bond yields.
  • If rate cuts continue into 2025, fixed rates could decline even further.

📌 Best Move:
✅ If you’re getting a mortgage now, consider a short-term fixed rate (1-3 years) to take advantage of further cuts later.
✅ If you’re renewing soon, watch the rate market closely before locking in.

B. Variable-Rate Mortgages: Gradual Payment Relief

  • Variable rates will start dropping as the BoC continues to cut rates.
  • However, rate cuts won’t happen all at once—they will be spaced out over time.
  • Expect small payment decreases at first, with more relief in late 2024 & 2025.

📌 Best Move:
✅ If you already have a variable-rate mortgage, expect gradual relief, not instant drops.
✅ If you’re choosing between fixed and variable, variable rates will likely become cheaper by mid-2025.

C. Home Prices: Will They Rise Again?

  • Lower rates typically boost buyer demand, which could drive home prices higher in 2025.
  • However, if inventory remains low, we could see another competitive market.

📌 Best Move:
✅ If you’re waiting for lower rates to buy, be prepared for more competition in 2025.
✅ If you’re selling, expect rising demand as buyers return to the market.

3. What to Watch for in 2025

✅ More Rate Cuts Expected

  • The BoC is likely to continue cutting rates throughout 2024 and into 2025.
  • The pace will depend on economic conditions, but most forecasts predict gradual cuts over the next 12-18 months.

✅ U.S. Federal Reserve Policy

  • If the U.S. eventually starts cutting rates in 2025, it could accelerate Canadian rate cuts.
  • However, if the Fed keeps rates high, the BoC may slow down its cuts to prevent too much CAD weakness.

✅ Housing Market Response

  • Will lower rates bring buyers back and push home prices higher?
  • If so, waiting too long to buy could mean paying more for a home next year.

Conclusion

📉 Canada has officially entered a rate-cut cycle, while the U.S. is holding steady.
📌 Borrowers should expect lower fixed and variable rates in 2025, but price trends depend on how quickly rates fall.
💡 Homeowners, buyers, and investors should act strategically to take advantage of upcoming changes.

📌 Next week: We’ll break down how rate cuts affect fixed vs. variable mortgages and which option makes the most sense for 2025!

Social Media Caption:

🚨 Canada is cutting rates while the U.S. holds steady—what does this mean for your mortgage? 🏡📉 Learn how lower rates will impact homeowners, buyers, and the real estate market in 2025!

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