Canadian and US Dollar and Policy Rate Divergence Accelerate Mortgage Market Downside Risks

As the U.S. Federal Reserve and the Bank of Canada move in different directions on interest rate policy, a growing gap is emerging between the Canadian and U.S. dollars — and it’s shaking up the mortgage landscape. With the Fed holding steady or even leaning hawkish while the BoC begins easing, currency pressures and rate disparities are adding new layers of risk to Canada’s already fragile housing market. For lenders and borrowers alike, this divergence could mean more volatility ahead, especially in the fixed-rate space where U.S. bond yields play a major role.

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Bank of Canada’s Rate Cut vs. Federal Reserve’s Hold

The Bank of Canada (BoC) recently cut its policy rate to 3.00%—the sixth reduction in a row—as it tries to support a slowing economy. Alongside that, the BoC ended its quantitative tightening program, signaling a shift towards stabilization.

Meanwhile, the US Federal Reserve held its benchmark rate steady between 4.25% and 4.50%, drawing a sharp contrast and setting the stage for increased divergence between Canadian and US monetary policies.

The result? A growing gap between the Canadian and US dollars, rising volatility in mortgage pricing, and more complex borrowing conditions for Canadians.

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How the Currency Gap is Reshaping Canadian Mortgages

This widening rate spread—over 1%—has pushed the Canadian dollar down by 7.7% in 2024, now hovering below 70 cents USD. That has multiple knock-on effects:

• Higher import costs (everything from food to construction materials), increasing inflation risk.
• Unpredictable mortgage pricing, especially for fixed-rate loans tied to bond markets.

BoC’s rate cuts should, in theory, ease borrowing costs. And they have—for variable-rate mortgages and HELOCs. But fixed-rate mortgages depend on bond yields, and lenders are pricing in risk premiums due to uncertainty, keeping fixed rates from dropping as quickly.

Adding to the pressure: US tariffs. The US is threatening to impose a 25% tariff on Canadian imports. If this becomes reality, the BoC’s own Monetary Policy Report predicts a 2.4% GDP drop in year one and 1.5% in year two—a potential economic slowdown that could rattle Canada’s housing market.

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What This Means for Homeowners and Mortgage Shoppers

Here’s how the current environment is affecting you:

• Variable-rate borrowers are seeing lower monthly payments—but need to stay alert. If inflation picks up again due to a weak loonie or tariffs, rates could rise.
• Fixed-rate shoppers face more uncertainty. Bond yields have dipped, but lenders are cautious about passing on savings due to increased economic risk.
• Home prices could go either way. Lower rates may spur demand, but economic shocks (like a trade war) could dampen buyer confidence.
• Renovation and new build costs are climbing. A weaker dollar makes imported materials more expensive—even if your mortgage is cheaper.
  

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Navigating Mortgage Strategy in a Shifting Economy

So what should Canadian borrowers do?

• Lock in early if you’re shopping for a home—especially if you’re leaning fixed.
• Refinance now if your variable rate has dropped and you have room to leverage equity.
• Stay flexible. Don’t try to time the market—plan for both best- and worst-case scenarios.

With the BoC loosening and the Fed holding tight, we’re in unfamiliar territory. Currency swings, bond volatility, and inflation risk make mortgage strategy more critical than ever.

Let Mortgage.Expert help you understand your options and make a choice that aligns with your financial goals.

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Why Choose Mortgage.Expert

We’re not your average mortgage team. Our salaried advisors offer unbiased, commission-free guidance, focused on helping you make smart, confident choices.

From navigating currency risk to locking in the right mortgage rate, we’re here to simplify your experience.

Reach out to a Mortgage.Expert advisor today — and take the guesswork out of your next move.