Recently, there’s been a remarkable shift in Canada’s financial landscape. On June 4, 2025, the Bank of Canada announced it would keep its main interest rate steady at 2.75%, opting not to initiate the expected rate cuts. Prior to this announcement, several big Canadian banks had already increased their fixed mortgage rates. This created a disconnect; while the central bank maintained the status quo, mortgage rates continued to rise, suggesting that lenders expect borrowing costs to remain high for longer, or even increase, despite the central bank’s current stance.
1. Changing Market Expectations & Mortgage Rate Hikes
Although the financial market anticipates the Bank of Canada to decrease rates later this year, uncertainty remains. Inflation data from the past few weeks has shown numbers above expectations. International factors, such as the U.S. Federal Reserve delaying rate cuts, have also pushed up bond yields. As a result, commercial banks raised mortgage rates to compensate for rising borrowing costs.
For example, in late May, RBC raised its 3-year, 4-year, and 5-year fixed mortgage rates by 5 basis points, bringing its 5-year uninsured fixed mortgage rate up to 4.49%. Other major banks like CIBC followed suit. While this came around the same time as the Bank of Canada decision, the rate hikes were a response to bond market movements and internal funding costs, not a direct result of the central bank announcement.
2. Why Are Rates Rising Before Cuts?
Several factors drive this phenomenon:
- Persistent Inflation & Cautious Policy Outlook
Core inflation in Canada remained above 3% in April, exceeding the Bank of Canada’s target. Hence, the central bank has adopted a cautious approach, opting to delay any interest rate changes until there is more convincing evidence that inflation is declining. Meanwhile, markets have already adjusted their expectations, pushing medium- and long-term bond yields higher.
- Bond Market Dynamics
Fixed mortgage rates are typically tied to 5-year Government of Canada bond yields, which rose from around 2.5% in early April to approximately 2.8% by the end of May. This reflects renewed market assessments of inflation and interest rate trajectories, which in turn drive mortgage rates upward.
- Banking Strategy Adjustments
Banks are under pressure from deposit competition, regulatory requirements, and slowing mortgage demand. With rising funding costs and tighter profit margins, banks raise lending rates as a defensive strategy.
Ultimately, the recent mortgage rate increases are not a direct consequence of Bank of Canada decisions but rather the result of dynamic market forces at play.
3. Real Estate Investment Options in the Current Market
Canadian real estate in core cities such as Vancouver and Toronto has been a favourite among investors for its relatively lower risk and steady returns, especially when compared to stocks or mutual funds. In today’s environment of high mortgage rates and rate misalignment, how can investors still seek stable returns on real estate?
Let’s compare some common options:
a. Rental Property Investment
High interest rates have raised financing costs, significantly reducing net rental yields. In many cases, monthly mortgage payments now exceed rental income, creating negative cashflow. While homeowners remain optimistic about future home price growth, the short-term holding costs have made such investments less attractive.
b. REITs (Real Estate Investment Trusts)
While REITs offer liquidity and lower entry barriers, their valuations are highly sensitive to market sentiment. In this high-rate, high-inflation environment, REIT returns have been volatile and uncertain.
c. Private Real Estate Development or Crowdfunding
These often involve long project timelines, limited transparency, and higher default risks. The high-rate era further raises development costs and execution risks.
d. Publicly Traded Real Estate Companies
Investing in publicly listed developers and builders can provide growth potential and capital appreciation from the value chain of real estate. However, their stock prices are highly volatile and require precise timing. For instance, Tricon Capital Group, a leading Canadian developer, has seen significant gains in 2024, but its stock remains over 20% lower than its 2022 highs. This investment route is better suited for sophisticated or institutional investors with a higher risk tolerance.
e. MIEs (Mortgage Investment Entities), such as Gentai Capital
MIEs provide short-term, asset-backed mortgage loans to real estate borrowers and distribute interest income to investors. They represent a critical part of the real estate financing ecosystem, offering shorter durations, solid collateral, and attractive, stable yields. In today’s market, their advantages are especially prominent.
4. The Advantages of MIE Investment
- Stable Cash Flow & Attractive Returns:
Most MIEs pay out regular income monthly or quarterly, delivering consistent and competitive yields.
- Robust Risk Management:
All loans are backed by real estate collateral, with carefully controlled Loan-to-Value (LTV) ratios. Even in the event of borrower default, the MIE can mitigate losses through asset recovery.
- Low Market Correlation:
MIE returns are driven by interest from secured loans, not by public market sentiment. This makes them a strong candidate for portfolio diversification and reducing volatility.
It’s important to note that not all MIEs are created equal. Their ability to manage risk, screen loans, and maintain a high-quality portfolio varies significantly. Choosing a firm with experience, transparency, and disciplined lending practices is essential.
Take Gentai Capital as an example: with a rigorous approval process, conservative loan underwriting, active asset monitoring, and a client-first approach, Gentai has delivered stable returns and low volatility for over 13 years, even amid turbulent market conditions. It is a leading example of a high-quality MIE in today’s Canadian market.
5. Conclusion: Finding Opportunity Amid Interest Rate Imbalances
Canada’s current market presents an unusual dynamic whereby central bank rates are on hold, yet market rates are rising, creating a “rates up before cuts” scenario. This shift highlights a key insight:
investors should not rely solely on policy announcements but instead watch actual funding costs, bank behaviours, and the risk-return structures of financial instruments.
In a high-rate environment, traditional real estate investing has become more burdensome. MIEs, supported by real estate collateral offering stable income and low volatility, are gaining traction among high-net-worth and accredited investors. For those seeking predictable cash flows without direct exposure to high leverage real estate holdings, MIEs represent a timely and effective alternative to navigate today’s evolving landscape.
6. Gentai Capital: 13 Years of Focused Expertise in Mortgage Investment
As a pioneer in Canada’s mortgage investment sector, Gentai Capital has operated steadily for nearly 13 years, managing assets totaling CAD 435 million. One of Gentai’s funds, the Gentai Residential Mortgage Fund, focuses on residential mortgage investments. Under strict risk control, the fund has delivered annualized returns of 6.1% to 7.5% since its inception.
As an example, an investor who contributed $100,000 at inception would have seen their investment grow to $129,229 by March 31, 2025; showcasing the power of compound returns and consistent income.
