Bank of Canada cuts target interest rate to 2.25% in October 2025 announcement
What this means for your mortgage rate
The Bank of Canada has continued its rate cutting cycle, further easing borrowing costs for home buyers and loan holders. The central bank opted to lower its benchmark lending rate by another 25 basis points, bringing it to 2.25% – a low not seen since the spring of 2022, and officially bringing the rate to the lower end of the Bank’s “neutral” range of 2.25% - 3.25%. This means any future cuts made by the Bank will be considered extra stimulative, and could put upward pressure on inflation.
In response to today’s cut, the prime rate used by consumer lenders will lower in kind to 4.45%.
That in turn will influence the pricing for variable mortgage rates; should lenders factor in the entire rate decrease, the lowest five-year variable term in Canada will drop to 3.45% from the current 3.7%.
Today’s decrease marks the second consecutive cut from the Bank, following a quarter-point decrease on September 17. Prior to this, the Bank had kept the rate unchanged since April, after lowering it to 2.75% in March.
This latest rate cut was widely anticipated by economists following a slew of data that shows the economy is sputtering in the wake of the extended trade war. The unemployment rate remained unchanged at 7.1% in September, while overall GDP contracted by 1.6% in the second quarter of the year.
Most recently, the quarterly Business Outlook Survey conducted by the Bank showed souring sentiment among business owners, who expect they’ll hire and invest less in the coming months as tariffs heap on price pressures, while exports have slowed.
However, fewer rate cuts may now be in store; according to the Bank’s commentary, the effects of US trade upheaval on economic growth and inflation is becoming “somewhat clearer,” which has allowed the Bank to reissue a projection for economic growth; it now expects GDP will rise by 1.2% in total this year, followed by 1.1% in 2026, and 1.6% in 2027. While the Bank acknowledges the projection is “subject to a wider-than-usual range of risks,” should the economy perform as expected, additional rate cuts won’t be necessary.
“If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment,” reads the announcement accompanying the rate cut. ‘If the outlook changes, we are prepared to respond. Governing Council will be assessing incoming data carefully relative to the Bank’s forecast.”
The Bank also stated that it believes inflation is stabilizing; while the September Consumer Price Index came in higher than expected, rising by 2.4% year over year from the 1.9% recorded in August, the bank thinks the core measures show growth of around 2.5%, and that will ease to within the Bank’s 2% target within the near term.
What does today’s rate cut mean for mortgage borrowers?
Variable mortgage rates will lower
Those most directly impacted by this latest rate cut are variable-rate mortgage holders; their mortgage’s interest rate is directly correlated to the Bank of Canada’s overnight lending rate. Depending on the type of variable mortgage they have, borrowers will see either their monthly payment lower, or a larger portion of their payment servicing their principal loan amount.
According to Ratehub.ca's mortgage payment calculator, a homeowner who put a 10% down payment on a $676,154* home with a 5-year variable rate of 3.70% amortized over 25 years (total mortgage amount of: $627,404) has a monthly mortgage payment of $3,199.
With today’s 25-basis point rate decrease, their variable mortgage rate will decrease to 3.45% and their monthly payment will decrease to $3,116.
This means that the homeowner will pay $83 less per month or $996 less per year on their mortgage payments.
However, now that we’ve entered an overall lower borrowing environment, lenders may be less likely to pass on the full discount to their variable rates, instead shortening the spread to the prime rate to preserve their margins. Anyone shopping for a variable rate right now is wise to get a pre-approval and rate hold as soon as possible to ensure access to current prime spreads.
What about fixed mortgage-rate borrowers?
Fixed mortgage rates are not directly affected by the Bank of Canada’s rate changes, but they are influenced by the bond market, which does indeed react to central bank movement. Because this rate decrease was so widely expected, bond markets have already priced it in. The Government of Canada five-year bond yield – which is used by lenders when pricing their five-year fixed rates – has remained in the 2.5 - 2.6% range since mid-October. For context, the last time yields were that low was back in April, when markets violently reacted to the initial fallout from Trump’s “Liberation Day” tariff announcement.
Yields have also been pushed lower by expectations that the US Federal Reserve – the American counterpart to the Bank of Canada – will also cut its rate again (its rate announcement is at 2 p.m. today). This is due to soft inflation numbers in the US, though the Fed continues to be challenged by a lack of data due to the prolonged government shutdown. In response, the US 10-year Treasury yield, which acts as a global benchmark for debt costs, has sat below 4% since October 21.
As a result, Canadian fixed mortgage rates have come down in recent weeks; the lowest five-year term on Ratehub.ca is currently 3.79%, a low not seen since this past spring.
However, further drops are unlikely, given the Bank has indicated it will likely hold rates in the months to come.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.