May 22, 2024

How the Drop in Inflation in Canada Could Affect Mortgage Rates and the Housing Industry

How the Drop in Inflation in Canada Could Affect Mortgage Rates and the Housing Industry

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Canada has recently seen a significant decline in its inflation rate, with April’s data showing a drop to a three-year low of 2.7%. This trend is crucial for the mortgage and housing industry, as inflation rates directly influence mortgage rates and, consequently, the housing market. In this article, we will explore how the recent drop in inflation could impact mortgage rates and the broader housing industry in Canada.

Understanding Inflation and Its Impact on Mortgage Rates

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It’s measured using the Consumer Price Index (CPI), which tracks the price changes of a basket of goods and services over time.

Inflation is influenced by various factors such as consumer demand, production costs, and monetary policies. Central banks, like the Bank of Canada, use interest rates to control inflation. When inflation is high, central banks increase interest rates to cool down the economy. Conversely, when inflation is low, they may cut interest rates to stimulate economic activity. Mortgage rates, which are influenced by these central bank interest rates, tend to rise with high inflation and fall when inflation is low.

The Relationship Between Inflation and Mortgage Rates

Mortgage rates play a crucial role in the housing market as they determine the cost of borrowing for homebuyers. When mortgage rates are low, it becomes more affordable for individuals and families to purchase homes. Conversely, higher mortgage rates make borrowing more expensive and can dampen housing demand.

Central banks adjust interest rates as a tool to manage inflation. When inflation is high, central banks increase interest rates to reduce spending and cool down the economy. Higher interest rates make borrowing more expensive, leading to a decrease in housing demand and potentially lower housing prices. On the other hand, when inflation is low, central banks may cut interest rates to stimulate economic activity. Lower interest rates make borrowing more affordable, which can lead to increased housing demand and potentially higher housing prices.

Historical Context:

To understand the potential impact of the recent drop in inflation on mortgage rates and the housing industry, it is helpful to consider historical trends. In the late 1970s and early 1980s, Canada experienced high inflation rates, with mortgage rates soaring to double-digit figures. Conversely, the low-inflation environment following the 2008 financial crisis saw historically low mortgage rates, contributing to increased housing affordability and a surge in home purchases.

April’s Inflation Data

In April 2024, Canada’s annual inflation rate fell to 2.7%, down from 2.9% in March. This marks the fourth consecutive month of subdued inflation, providing a strong indication that disinflation is here to stay. The decline in inflation can be attributed to various factors, including lower energy prices, stable food costs, and subdued price pressures in other sectors of the economy.

Here is a summary of the recent inflation data:

Inflation Rate

January 3.3%

February 3.1%

March 2.9%

April 2.7%

Economists’ Predictions

Economists are increasingly confident that the Bank of Canada will cut interest rates in June. Andrew Grantham, executive director of economics at CIBC, describes the recent inflation data as “providing the all clear” for the Bank of Canada to begin cutting rates. He highlights that the central bank has been encouraged by recent subdued inflation readings and that the consecutive months of tame underlying inflation support the forecast of a first rate cut at the next meeting in June.

Tu Nguyen, an economist with RSM Canada, goes further to say that a June rate cut is now a “no-brainer.” She argues that with the economy dragging along and headline inflation falling in the 1-3% range for the fourth consecutive month, there is no reason for the Bank of Canada to wait until July. The April data sends a clear message that disinflation is here to stay.

However, not all economists are aligned in their predictions. Leslie Preston, managing director and senior economist at TD Bank, expects the first rate cut to come in July. She suggests that inflation still remains a little high for comfort and that the Bank of Canada may want to see more confirmation before taking rates lower.

Implications for Mortgage Rates

Expected Changes in Mortgage Rates

If the Bank of Canada cuts interest rates in June, mortgage rates are likely to decrease. Lower mortgage rates can have a significant impact on housing affordability, making homeownership more accessible for Canadians.

The timeline for when mortgage rate changes could occur depends on how quickly lenders adjust their rates in response to the central bank’s decision. Typically, it takes a few weeks for changes in the central bank’s policy rate to be reflected in the mortgage market. Therefore, if the Bank of Canada cuts rates in June, borrowers may start to see lower mortgage rates by late June or early July.

Impact on New Homebuyers

Lower mortgage rates have several benefits for first-time homebuyers:

  1. Increased Affordability: Lower mortgage rates reduce monthly mortgage payments, making homeownership more affordable for first-time buyers. With lower borrowing costs, prospective homebuyers may find it easier to qualify for mortgages and purchase homes.
  2. Stimulated Housing Demand: Affordable mortgage rates can stimulate housing demand, as more individuals and families are motivated to enter the housing market. Increased demand can lead to a more competitive market, potentially driving up housing prices in certain areas.
  3. Opportunity for First-Time Buyers: Lower mortgage rates provide an opportunity for first-time buyers to enter the housing market, especially those who may have been previously deterred by high prices or borrowing costs. This influx of new buyers can contribute to a healthier and more active housing market.

Impact on Existing Homeowners

Existing homeowners can also benefit from lower mortgage rates:

  1. Opportunities for Refinancing: With lower interest rates, existing homeowners may consider refinancing their mortgages. By refinancing at a lower rate, homeowners can potentially reduce their monthly mortgage payments or shorten the term of their loan. This can result in significant savings over the life of the mortgage.
  2. Financial Flexibility: Lower mortgage rates can provide homeowners with increased financial flexibility. They may choose to use the savings from lower mortgage payments to invest in home improvements, pay off other debts, or save for other financial goals.

Broader Effects on the Housing Market

Increased Housing Demand

Lower mortgage rates can stimulate housing demand in several ways:

  1. Affordability Boost: Lower borrowing costs make homeownership more affordable, attracting more potential buyers to the market. This increased demand can lead to a more competitive housing market, potentially driving up housing prices in certain areas.
  2. Higher Activity Levels: With increased affordability, potential buyers who were previously on the fence may be more inclined to enter the housing market. This rise in activity can result in more transactions, benefiting real estate agents, mortgage brokers, and other professionals involved in the housing industry.
  3. Spillover Effects: Increased housing demand can have positive spillover effects on related industries, such as construction, home improvement, and retail. The demand for new homes and renovations can drive economic growth and job creation, contributing to a healthier overall economy.

Rent Prices and the Rental Market

While the focus has been on mortgage rates, it is crucial to consider the impact on the rental market as well. In some provinces, rent prices have been rising significantly despite the drop in inflation. For example, Alberta experienced a 16.2% year-over-year increase in rent prices in April, compared to the national average of 8.2%. Lower mortgage rates can indirectly influence the rental market by encouraging more people to buy homes, potentially easing pressure on the rental market.

Regional Variations

The impact of lower inflation and potential interest rate cuts might vary across Canadian provinces. Provinces with high rent increases or areas experiencing stronger economic growth may see different impacts compared to regions with more stable housing markets. For example, Calgary, Alberta, had the highest inflation rate in Canada at 3.6% in April, despite the national decline.

Regional variations can also be influenced by factors such as population growth, employment rates, and the overall economic conditions specific to each province. It is important to consider these variations when assessing the potential impact on mortgage rates and the housing industry.

Challenges and Considerations

Affordability Issues

While lower mortgage rates can improve affordability, high shelter costs remain a significant issue for many Canadians. The Statistics Canada report found that shelter prices increased by 6.4% year-over-year, putting strain on household finances. High and rising shelter costs, combined with other expenses, can make it challenging for individuals and families to enter the housing market or afford suitable accommodations.

Economic Uncertainties

While the drop in inflation and potential interest rate cuts provide optimism for the housing market, it is important to consider potential risks and uncertainties. The global economic landscape and external factors, such as geopolitical tensions or changes in commodity prices, can influence Canada’s economy and housing market. Additionally, the adjustments made by the U.S. Federal Reserve can also impact how far and how fast Canadian rates can fall.

It is essential for prospective homebuyers and existing homeowners to stay informed about economic developments, monitor changes in interest rates, and consider their financial circumstances before making significant housing-related decisions.


The recent drop in inflation in Canada opens the door for potential interest rate cuts by the Bank of Canada, which could lower mortgage rates. This change is likely to benefit both new homebuyers and existing homeowners, stimulating the housing market. However, challenges such as high shelter costs and economic uncertainties remain. As we move forward, it will be crucial for homebuyers and homeowners to stay informed, consider their options carefully, and seek professional advice when necessary.


What is the current mortgage rate in Canada?

The current mortgage rate varies by lender and can depend on factors such as the borrower’s creditworthiness and the type of mortgage. It is advisable to consult with multiple lenders or mortgage brokers to compare rates and find the best option for your specific needs.

How often does the Bank of Canada adjust interest rates?

The Bank of Canada typically reviews and adjusts interest rates eight times a year during its scheduled Monetary Policy Report releases.

What should I consider before refinancing my mortgage?

Before refinancing, it is important to consider factors such as the new interest rate, closing costs, the remaining term of your current mortgage, and your long-term financial goals. Consulting with a mortgage professional can provide valuable insights and help you make an informed decision.

At Everything Mortgages, we strive to help first-time homebuyers, small business owners, and hardworking professionals navigate their mortgage journeys. Whether it’s securing a loan or seeking better solutions, our team is here to guide you toward becoming mortgage-free sooner and building wealth faster. Reach out to us today to explore these strategies and more.

Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.

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