Canadian Mortgage Rate Update: The US/Iran Cease Fire and the Fed’s Hawkish Hold

Bond-market investors had their eyes on two key developments last week.

The US/Iran Cease-Fire Agreement

The cease-fire agreement appeared fragile the moment it was signed, particularly because Israel and Hezbollah haven’t stopped fighting, and there is scepticism that a resumption of pre-war traffic through the Strait of Hormuz will resume any time soon.

But if the agreement provides a step down in hostilities and allows for an increase in shipping traffic through the Strait, it should help to alleviate commodity shortages and prices (for as long as it lasts).

The US Federal Reserve’s Policy-Rate Meeting

The US Federal Reserve held its policy rate steady last week, as expected.

This was the first meeting for the new Fed Chair, Kevin Warsh, and he made some noteworthy tweaks to the proceedings. For example, the Fed’s policy statement and press conference were cut notably short, and Fed Chair Warsh did not include his personal estimate in the Fed’s dot-plot chart, which provides each member’s forecast of where the policy rate is headed.

Bond-market investors interpreted the Fed’s latest statement to be a “hawkish hold” because it removed any hint of additional cuts being considered and instead noted that economic growth was “solid” while inflation remained “elevated”.

The Fed’s latest dot-plot chart confirmed that nine of its members now expect to hike by the end of this year.

The Fed’s Summary of Economic Projections (SEP) showed the median projection for the Personal Consumption Expenditures (PCE) index in 2026 increasing from 2.7% in March to 3.6% in June. The PCE is the Fed’s preferred inflation gauge, and it uses a target rate of 2%, so the sharp increase in the PCE forecast was a warning that the Fed may start hiking, and sooner than expected.

US bond-market investors responded by moving up their bets on the timing of a 0.25% hike by the Fed from December to September.

The Latest on Mortgage Rates

Government of Canada five-year bond yields followed in the wake of their US Treasury equivalents last week.

They initially fell on Monday in response to the US/Iran cease-fire announcement, but quickly bounced back as the details emerged. Then, on Wednesday, yields swung higher after the Fed confirmed its hawkish hold.

It was a choppy week for bond-yields, but they remained range bound overall. Expect more volatility this week as cease-fire negotiations continue to evolve.

Fixed mortgage rates held mostly steady, and the discounts off prime offered on variable-rate mortgages increased a little.

Bond-market investors continue to price in one 0.25% policy-rate hike by the Bank of Canada in December and, with some increased conviction, after the Fed’s latest policy-rate announcement.

My Take on Today’s Mortgage Options

Fixed rates are likely to remain volatile. Three- and five-year terms are the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer better value.

Most of the borrowers I am working with right now are opting for the stability of fixed rates, and I certainly appreciate their appeal.

That said, I think variable rates are likely to prove cheaper over their full terms, especially now that spiking bond yields have put significant near-term pressure on fixed mortgage rates.

(Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs and, in some cases, higher payments.)

The BoC reiterated its willingness to look through the current inflation spike over the near-term, and our current inflation backdrop affords it the luxury to do that. But so much depends on if/when the Strait of Hormuz will re-open, whether it stays open, and on how long it takes for trade to approach some level of normalization.

If the war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank is compelled to tighten. For now, my assessment is that we won’t get to that point.

Insider’s Tip for Borrowers

Borrowers often ask me about the impact that a credit check will have on their scores. This post demystifies how credit scores are calculated and highlights the factors that matter most.

(Spoiler alert: while a periodic credit check does technically drop your score, the impact is both minor and temporary.)

Three Posts Every New Visitor to My Blog Should Read:

This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.

2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalti

For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.

3. What’s in the Fine Print

This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)

David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.

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