A period of uncertainty may surround the coming periods regarding the real estate market in Canada. While mortgage rates were beginning to decline, the business environment marked by the accumulation of tariffs imposed by the United States suggests fears of a slowdown in trade, investment, consumption and job creation. Are you planning to take out a mortgage or planning to renew your contract in the coming months? Here are tips for making an informed decision regarding your mortgage rate during a recession.
What to know about the current economic context?
- In Canada:
In 2024, the Canadian economy avoided a brutal recession. Inflation, which rose sharply in previous years, has now returned close to the 2% target set by the Bank of Canada. Despite an uncertain global context, economic growth exceeded 1%, supported notably by immigration, which boosts household consumption and encourages business investment.
Despite this situation, the economy still operates below its full potential. Consumer confidence remains fragile, partly due to the growing burden of mortgage payments to be renewed. External factors such as the threat of new tariffs imposed by the United States may slow the growth expected in 2025. The main Canadian banks anticipate modest growth, between 1.2% and 1.8%, for this year.
Inflation is now stable around 2%, good news for borrowers. In March 2025, it stands at 1.9%, although much of the remaining pressure comes from rental prices and housing-related costs. If we exclude these costs, real inflation would already be below target, around 1.7%.
Faced with this control of inflation, the Bank of Canada began to lower its key rate after maintaining it at 5% until mid-2024. Eight successive reductions brought it down to 2.75% in March 2025. This situation is a relief for borrowers, especially those renegotiating their mortgage this year. Some economists nevertheless estimate that the Bank will not be able to go much lower, fearing a resumption of inflation. A floor rate around 1.75% is envisioned by several experts.
- Internationally:
Since Donald Trump’s return to the political scene, trade relations between Canada and the United States are becoming tense. True to his protectionist approach, the American president imposes 25% tariffs on a wide range of Canadian and Mexican products, including a 10% tax on Canada’s energy and critical mineral exports. The Canadian government responds by instituting tariff measures on approximately 155 billion dollars worth of American products. These measures may remain in place throughout 2025, creating much uncertainty for businesses and consumers.
This trade standoff is not limited to governments. It can also disrupt supply chains, increase import costs and exert upward pressure on inflation in Canada. If goods become more expensive to produce or import, the situation can also slow economic growth and ultimately influence Bank of Canada decisions on interest rates. For borrowers, this situation means that the evolution of mortgage rates is likely to be affected by these international tensions, even if the domestic economic situation is under control.
Beyond North American issues, the war in Ukraine and other sources of geopolitical instability can also have an impact on the global economy. These events disrupt trade flows, drive up prices of certain commodities, such as energy and cereals, and maintain inflationary pressure in several countries. These international factors can quickly change the situation.
Specific impacts on the Canadian mortgage market
The more unstable the international and national environment is, the more difficult it is for the Bank of Canada to plan its monetary policies with confidence. If trade or geopolitical tensions cause an unexpected rise in inflation, the monetary institution may slow down interest rate cuts, or even maintain them longer at a high level. Such a situation is likely to delay a possible easing of mortgage rates: this important data should be monitored regularly.
What is a recession?
An economic recession is a period when a country’s economy slows down seriously for several months:
- This means the country produces fewer goods and services than before.
- Gross Domestic Product (GDP) falls for at least two consecutive quarters (6 months).
Recommended strategies for 4 economic scenarios in Canada
- Scenario 1: in case of limited growth with stable inflation
In a context of limited economic growth but stable inflation, mortgage rates should maintain relative stability in 2025.
- For potential buyers, this period represents an interesting opportunity to enter the market. Don’t hesitate to exploit this stability to negotiate the best possible conditions with financial institutions. Take the time to shop around, to discuss interest rates and contractual clauses to obtain a mortgage loan adapted to your long-term financial situation.
- Faced with moderate economic growth and controlled inflation, 2025 may also offer an environment conducive to prudent real estate expansion. Although growth is limited, the stability of mortgage rates can support rental demand and asset valuation. For investors, it is advisable to adopt a selective approach, favoring investments in promising sectors and well-located real estate. Rigorous market analysis and efficient rental management will be essential to maximize returns in this economic context.
- Scenario 2: in case of stagflation
We speak of stagflation when a country experiences limited or zero economic growth and inflation is high.
In such a context, mortgage rates are likely to increase, as the Bank of Canada might seek to control price increases. Economic uncertainty, potentially exacerbated by policies such as imposing tariffs and deportation of immigrants, can then maintain inflationary pressure.
- For borrowers, opting for a fixed rate appears as a prudent strategy faced with this prospect of rising rates and unpredictability. A five-year fixed rate offers budget security and protects you against possible significant increases in borrowing costs. Increased caution is required before committing to a real estate purchase in this uncertain economic climate.
- During stagflation, real estate investment is an approach that requires a selective and strategic approach. Economic stagnation can limit rent growth, while inflation reduces purchasing power. When this situation occurs, focus on high value-added properties, such as properties requiring renovations or improvements that increase their attractiveness and rental income potential. Look for opportunities where you can create tangible value and thus stand out in a potentially stagnant market. Rigorous cost management and thorough analysis of each investment’s potential will be crucial to maintain profitability in a stagflation environment.
- Scenario 3: in case of economic slowdown with controlled inflation
In a context of economic slowdown (i.e. where the GDP growth rate is negative) and controlled inflation, mortgage rates should begin to decline, as the Bank of Canada seeks to stimulate economic activity. Having already begun to ease its monetary policy, other key rate reductions are anticipated by several economists.
- For buyers, this situation suggests that a strategic waiting position could be wise. A variable rate could prove to be a relevant choice, as it should follow the downward trajectory of the key rate, reducing your borrowing costs over time.
- An economic slowdown with controlled inflation can create interesting acquisition opportunities for real estate investors. The decline in interest rates can make financing more affordable and potentially stimulate some demand. Be attentive to undervalued real estate or motivated sellers in this slowdown context. Rigorous market analysis and identification of resilient sectors will allow you to make opportunistic acquisitions with valorization potential in the medium and long term, once economic recovery begins.
- Scenario D: in case of economic slowdown with inflation
Canada may also enter a phase of economic slowdown accompanied by persistent inflation.
- In this case, it is essential to act with caution before contracting a new mortgage loan. Interest rates, particularly fixed rates, may rise again due to trade tensions and market uncertainty. Delaying the purchase or renewal of a mortgage is the recommended approach, if the situation allows: this approach can avoid committing to unfavorable conditions. Uncertainty in the job market may expose some households to a risk of income loss. It is therefore wise not to over-borrow and to maintain financial flexibility.
- For investors, the priority in an unstable environment is securing cash flows. Ensuring that properties generate regular income is essential, emphasizing tenant stability and rigorous management of operating costs. It may also be relevant to favor long-term investments in sectors less sensitive to economic fluctuations, or to diversify one’s portfolio to mitigate risks. As mortgage rates can become volatile in such a context, it is recommended to negotiate flexible financing conditions.
History of past recessions
Recent Canadian economic history presents several recessions with varied impacts:
| Recession Period | Main Causes | Economic Impact | Key Rate Evolution | Impact on Canadian real estate market |
| 1981-1982 | High inflation | Unemployment at 12% | Sharp increase (20.03% in August 1981) | Sales collapse, price decline, increased foreclosures |
| 1990-1992 | Global recession | High unemployment | Declining after peak of 13.65% in 1990 | Price correction, particularly in major centers |
| 2008-2009 | Financial crisis | GDP decline of 3.3% | Sharp decline (0.5% in March 2009) | Temporary slowdown, rapid recovery thanks to low rates |
| 2020-2021 | COVID-19 pandemic | GDP decline of 5.54% | Sharp decline (0.25% in July 2020) | Marked price increase following historically low rates |
Recessions generally lead to rate cuts to stimulate the economy, except in cases of high inflation. The Canadian market has shown historical resilience compared to the United States, especially in major urban centers. A 3 to 6-month lag is often observed between changes in the key rate and mortgage rate adjustments.
3 practical tips to better adapt to the current situation
- Choose between fixed and variable rates
Your choice depends on your profile and your risk tolerance. A five-year fixed rate offers stability, especially in an uncertain economic context. With expected cuts to the key rate, a variable rate can however become interesting. A hybrid solution, with a fixed part and a variable part, is also possible.
- Prepare for the unexpected
Build an emergency fund to cover several months of expenses. This solution will prevent you from selling your investments during unfavorable periods. Simulate the impact of a 1 to 3% rate increase on your monthly payments and consider renegotiation options before a possible recession.
- Optimize your financing and investments
Ask your broker questions about prepayment penalties, mortgage portability and possibilities to increase your payments. Get pre-approval to secure a low rate. On the investment side, diversify your assets, stay focused on your long-term objectives and regularly rebalance your portfolio. Use a qualified appraiser to better assess risks.
Conclusion
The coming months will require increased vigilance regarding economic developments. Since your situation is unique, tailored advice is key. Stay faithful to your long-term financial objectives and invest wisely according to your risk tolerance level. Keep in mind that recessions are temporary and generally herald a lasting recovery. Good cash cushion will help you weather the turbulence and take advantage of market recovery.
Glossary of key economic terms
- Key rate: Interest rate set by the Bank of Canada that influences other interest rates, including mortgage rates.
- Stagflation: Economic situation combining economic stagnation and high inflation.
- Recession: Significant decline in economic activity for at least two consecutive quarters.
- Rate spread: Difference between the key rate and mortgage rates offered to consumers.
- GDP (Gross Domestic Product): Measure of a country’s economic activity. A decline in GDP for two consecutive quarters is a common definition of recession.
- Unemployment rate: Percentage of the active population without employment. A recession generally leads to an increase in the unemployment rate.
- Inflation: General and lasting increase in prices. It recently reached peaks and influences costs for consumers and businesses.
- Government bonds: Debt securities issued by the government, whose yield notably influences fixed mortgage rates.
- Fixed rate vs variable rate: A fixed rate remains the same throughout the term duration, while a variable rate fluctuates according to the bank’s prime rate, itself influenced by the key rate.