Bank of Canada Set to Cut Key Rate to 2.25% on October 29 — What It Means for Mortgages

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Toronto | 25-Oct-2025, 09:00 EST — Filed on 24-Oct-2025, 21:30 EST via Reuters

The Bank of Canada (BoC) is poised to deliver its second rate cut of the year, with economists forecasting a 25 basis point reduction to 2.25% at the October 29 policy meeting. The move is widely seen as a response to a softening Canadian economy, which shrank 1.6% in Q2 2025.

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Why the Bank of Canada Is Cutting Again

Economists highlight three main factors driving the BoC’s decision:

• Economic contraction: GDP fell at an annualized pace of 1.6% in Q2, pressured by sluggish exports, weaker consumer demand, and a cooling housing market.
• Inflation relief: Headline inflation has dropped toward the 2% target band after remaining stubbornly high through 2023–24, giving policymakers more flexibility.
• Global uncertainty: Weakness in U.S. growth, energy price volatility, and geopolitical risks are weighing on Canadian trade and investment.

BoC Governor Tiff Macklem recently noted that “further easing may be warranted if downside risks to growth materialize,” suggesting that the October cut may not be the last.

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Mortgage Impact: Variable vs Fixed

For homeowners and buyers, the rate decision carries different consequences depending on mortgage type.

Variable-Rate Mortgages

Borrowers with variable-rate loans directly tied to banks’ prime lending rates stand to gain the most. If lenders pass on the full 25 basis point cut, monthly payments could drop noticeably. For example:

• On a $500,000 mortgage amortized over 25 years, the payment could decrease by roughly $100 per month, depending on the product.
• Households carrying larger balances or multiple properties could see even greater relief.

This follows September’s cut, meaning variable-rate borrowers may be looking at a cumulative 50 bps reduction in just two months.

Fixed-Rate Mortgages

For fixed-rate borrowers, the picture is more complex. Fixed rates are primarily influenced by bond yields, which reflect investor expectations for inflation and long-term economic growth. While yields have eased slightly in October, they remain higher than many borrowers’ existing contract rates.

This means:

• Homeowners renewing a five-year fixed mortgage in 2025 may still face higher payments than their prior term.
• Lenders may offer modestly improved rates compared to August, but sharp drops are unlikely unless bond yields fall further.

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Broader Housing Market Effects

The housing market could see a sentiment boost from the announcement, though affordability remains stretched in major cities like Toronto and Vancouver.

• Lower variable rates could help marginal buyers qualify for more financing under the mortgage stress test, easing some affordability constraints.
• At the same time, Canada’s record-high household debt levels mean even modest payment relief may not fully offset rising costs elsewhere.

According to Statistics Canada, the household debt-to-income ratio remains above 170%, one of the highest among advanced economies. That makes Canadian households particularly sensitive to interest-rate shifts.

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Risks and Caution Ahead

Analysts warn that rate cuts are not a cure-all:

• Inflation rebound risk: If energy prices rise or wage growth accelerates, inflation could re-ignite, forcing the BoC to pause or even reverse course.
• Housing imbalances: Easier credit could reignite housing demand, putting upward pressure on prices at a time when supply remains tight.
• Investor confidence: A perception of weakening fundamentals could affect foreign investment flows into Canada’s bond and housing markets.

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Outlook

Markets are pricing in at least one more 25 bps cut in early 2026 if the economy fails to rebound. However, much depends on how quickly consumer spending stabilizes and whether global conditions improve.

For now, borrowers can expect some immediate relief if they hold variable-rate products, while fixed-rate holders will need to continue watching bond market trends.

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