What happens to mortgage rates if the Canada-U.S. trade war ends?

For months, the chaotic trade war launched by the U.S. against Canada and much of the world has been the single largest driver of where mortgage rates will go.

It led some economists to wonder just how much the Bank of Canada would need to cut rates if the trade war caused a severe recession, while others worried about the inflationary effect of tariffs and whether that would limit the central bank’s ability to cut. Bond markets, which impact fixed mortgage rates, also fluctuated wildly since the beginning of the trade war.

But earlier this week at the Group of Seven summit in Canada’s Rocky Mountains, U.S. President Donald Trump and Prime Minister Mark Carney committed to reaching an economic and security deal within a month that would put an end to the trade spat between the two countries.

Such a deal could prompt the Bank of Canada to keep its headline interest rate steady and hold variable-rate mortgages at their current level for the foreseeable future, while there could be opportunity for fixed-rate mortgages to become cheaper, economists and other market analysts say.

There are two main factors that drive Canadian mortgage rates. The Bank of Canada’s decisions on its headline interest rate directly impact variable mortgage rates, while the Canada 5-year bond yield heavily influences how lenders set their long-term fixed rates.

If a credible economic deal brings back consumer confidence and the economy rebounds, Bank of Montreal senior economist Robert Kavcic said the BoC would likely keep rates at its current level of 2.75 per cent – which is right in the middle of its stated neutral rate range of 2.25 to 3.25 per cent.

“These rates are what you could consider normal – with a trade war you would see rates go further to the downside,” said Mr. Kavcic.

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Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal said an imperfect deal that doesn’t completely solve the trade dispute between Canada and the U.S. could lead the central bank to cut just one more time this year.

Ron Butler, founder of Butler Mortgage in Toronto, said that while the economy could stabilize with a deal, a rebound in jobs growth isn’t necessarily a given. He noted there are still worries in Ontario that auto manufacturing jobs could leak to the U.S. as a way for companies to shield themselves from Mr. Trump in the future.

If jobs numbers don’t rebound, that could also be grounds for continued cuts, Mr. Butler said.

Current market expectations are that the BoC will only cut rates by another 25 basis points in 2025. That number has steadily decreased from a couple months ago when markets expected the BoC to cut another 75 basis points this year.

Meanwhile, what happens in the bond market and with fixed rate mortgages could be more fickle.

Mr. Tal said we can expect that bond yields will come down if we hear more positive news about a deal between Canada and the U.S.

But he added that the Canada 5-year bond yield is heavily impacted by the U.S., and a decrease in yields depends on whether the U.S.-China trade spat is solved and on general confidence around U.S. fiscal policy.

“If there will be something good happening to Canada, there has to be something good happening with other countries,” said Mr. Tal, referring to reducing bond yields.

He noted that the U.S. has been reducing tariffs against China and there is optimism that the dispute between those two countries could improve.

Shaun Cathcart, senior economist at the Canadian Real Estate Association, said that an end to the trade war could be enough to create moderate rebound in a housing market that has seen extremely low levels of sales in 2025.

However, he said any rebound will be limited by the fact that mortgage rates are still relatively high.

“Rates have been lower for a decade and a half, and prices in many parts of the country have adjusted to that reality, which we’re no longer in,” said Mr. Cathcart.

“So affordability has improved, but it’s still not good.”