The Bank of Canada cut rates by 25 bps in January 2025, with more cuts likely this year. However, U.S. tariffs could disrupt the interest rate outlook. Keep reading for more on how to navigate 2025.

As of January 29, 2025, the Bank of Canada’s policy interest rate stands at 3.0%. This rate is the foundation for many other interest rates that affect your investments.
Bank of Canada's Policy Interest Rate Forecast By Major Bank
Many Canadian economists are forecasting at least a couple more rate cuts this year.
These economists believe that the Canadian economy still requires additional support, particularly in areas like business investment and export activity. A further easing of monetary policy could help maintain economic momentum.
With this outlook, the Bank of Canada may need to cut rates to about 2.5% by the end of 2025 to provide additional stimulus.

Source: Elevate Realty, Bank of Canada, TD, CIBC, BMO, RBC, Scotia.
Key Factors Influencing Interest Rates
The Bank of Canada (BoC) is monitoring three key factors as it navigates the economy, with the looming threat of U.S. tariffs adding a layer of uncertainty to each:
- Inflation: The BoC targets 2% inflation, but U.S. tariffs on Canadian goods could drive up costs, especially imports, causing inflation to spike again. If the Canadian dollar weakens further (due to tariffs), this would make imports even more expensive, putting additional upward pressure on inflation. The BoC may need to adjust rates more aggressively to manage this.
- Economic Growth: The BoC projects moderate GDP growth of 1.8% for 2025-2026. However, the U.S. tariffs could significantly disrupt this growth by reducing Canada’s export competitiveness. This would slow down the recovery, particularly in sectors like oil and gas, where new export capacity was expected to help support growth.
- Canadian Dollar: The Canadian dollar is already weak, and if U.S. tariffs take effect, it could fall further. A weaker dollar would make imports more expensive and could fuel inflation, making it harder for the BoC to balance economic stability and inflation control.
With U.S. tariffs on the horizon, these three factors—inflation, GDP growth, and the Canadian dollar—are at risk of shifting dramatically, pushing the Bank of Canada to adjust its strategies. For investors, this means heightened volatility in both interest rates and economic conditions, which will influence investment decisions throughout 2025.

Source: Bank of Canada
How to Project Canada Mortgage Rates
Use these formulas to project different types of mortgage rates:
- Canada 3 Year Fixed Mortgage Rate: 3 year bond yield PLUS 1% to 2%
- Canada Prime Rate: Policy interest rate PLUS 2.2% to 2.35%
- Canada Variable Mortgage Rate: Prime MINUS 0% to 1%
- Canada Home Equity Line Of Credit (HELOC) Rate: Prime PLUS 0% to 2%
The Bond Yield Connection
When investors buy Canadian bonds, they’re essentially locking in an interest rate for the future.
So, the 3-year bond yield is closely related to the policy interest rate. If investors expect the Bank of Canada to raise rates, bond yields typically increase, and vice versa.
What is a fixed mortgage rate?
A fixed mortgage rate is a set interest rate that remains constant throughout the term of the mortgage loan. With a fixed rate, your monthly mortgage payments stay the same, providing stability and predictability over time.
It’s like locking in your rate to shield yourself from fluctuations in the market, giving you peace of mind knowing exactly what you’ll owe each month.
What is a Prime rate?
The prime interest rate is a rate set by a bank and serves as a benchmark for interest rates on various loans and financial products.
Banks typically set their prime rates based on the central bank’s policy rate and other factors, like prevailing market conditions and their own cost of funds.
What is a Variable Mortgage rate?
A variable mortgage rate can change over time based on the prime rate, potentially affecting your monthly payments.
While variable rates offer flexibility and potential savings, they also come with the risk of increased payments if rates rise.
What is a HELOC rate?
A HELOC allows you to borrow against the equity in your home as needed, similar to a credit card. The interest rate on a HELOC is variable, based on the prime rate.
HELOC rates are typically lower than other forms of credit, making them a popular option for accessing funds for home improvements, debt consolidation, or other expenses.
How Do Canada Interest Rates Impact The Toronto Real Estate Market?
With interest rates fluctuating, the real estate market is expected to remain soft but more stable than in recent years. Fixed rates are currently around 4%, and variable rates should also drop near 4% soon. This consistency will make rates more predictable, compared to the volatility we’ve seen between 3% and 6.5%, helping to stabilize property values.

As for rents, lower immigration and a weaker economy could lead to further declines. Here’s a quick estimate: for every 25 basis points a variable rate drops, rents could fall by around 2.5%, while cash flow remains stable. If we see three rate cuts in 2025, rents could drop another 5-10% without significantly impacting cash flow.
So, here’s what real estate investors should keep in mind:
- Don’t bet on property prices: The market is unpredictable right now.
- Focus on strong cash flow: Invest in multiplexes, not condos or single-family homes.
- Look for value-add opportunities: With government support for adding units, faster permit approvals, waived development charges, and more financing options, the cost of these projects is lower, making the returns more attractive—and giving you more control.
Here's How A Top Investment Property In Toronto Looks Like Today
At a purchase price of $1 million, with $50,000 invested in renovations, you could potentially generate slightly positive cash flow split into 3 units. Plus, with each mortgage payment, you’ll be building equity, and there’s a good chance of sustainable appreciation over time.
This combination sets the stage for great returns on investment and long-term success with a multi-unit Toronto investment property!

What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!