How Will the Iran War Impact Canadian Mortgage Rates?

 Our world is suddenly a lot different.

A week ago, I was focused on the negative economic impacts that US tariffs and trade uncertainty were having on the Canadian economy and mortgage rates. But that narrative took a backseat as soon as bombs started to fall in the Middle East. (They have struck twelve countries thus far.)

War brings terrible human suffering and loss, and other writers will rightly expound on that most important topic. This blog will keep a narrower focus on the war’s impacts on Canadian mortgage rates.

Thus far, those impacts haven’t been entirely as expected.

Bond-market investors generally snap up safe-haven assets when geopolitics creates instability. True to form, gold, the US dollar, and Swiss and Japanese bonds have all increased in price. But US Treasury yields spiked higher, pushing their prices lower. That was atypical.

Normally, investors pile into US Treasuries when war breaks out, causing their yields to fall. We saw examples of this at the start of the Gulf War, immediately following the September 11 attacks, and when Russia invaded Ukraine.

This time around, however, US Treasuries have lost their safe-haven allure, as have the Government of Canada (GoC) bonds, which follow their US counterparts in virtual lockstep.

Part of this unusual reaction can be chalked up to the spike in oil prices.

Middle Eastern wars push oil prices higher, and that adds inflation pressure, which becomes more widespread over time. If the war drags on, it could cause a major energy shock, which would engender even more severe economic disruption.

That risk is part of what is being priced in.

But the war is also exacerbating concerns about the inflationary impact of extraordinary deficit spending by the US federal government. Those concerns had already been percolating - and US federal deficits typically surge much higher once shots are fired because of the high cost of waging war.

Foreign buyers may also be pulling back over concerns about US policy direction (or the lack thereof).

Not even the news last Friday that the US economy lost an estimated 92,000 jobs in February could stop US Treasury yields from marching higher.

The latest US non-farm payroll data fell well short of the 55,000 new jobs expected by the consensus.

The US economy has now added an average of 6,000 jobs over the past three months. That weakening trend would normally fuel speculation that the US Federal Reserve will soon cut its policy rate in response. (Consider that the US economy needs to add an estimated 57,000 new jobs just to keep pace with the natural growth of its labour force.)

Simply put, the disappointing US employment data should have pushed US Treasury yields lower on Friday. The fact that it didn’t is further proof that bond yields on both sides of the 49th parallel, and the fixed mortgage rates that are priced on them, are likely to retain an upward bias over the near term.

The Latest on Mortgage Rates

GoC bond yields surged higher last week alongside their US Treasury equivalents for the reasons outlined in the section above.

In recent past posts, I predicted that US Treasury yields would retain an upward bias over concerns tied to rampant US deficit spending. That bias is now further entrenched because war costs are also being factored in.

This matters to anyone keeping an eye on Canadian fixed mortgage rates because the GoC bond yields on which they are priced will continue to follow where US Treasury yields take them.

Lenders quickly moved from cutting their fixed rates before the war started to raising them shortly thereafter. Further near-term increases should be expected.

Variable-rate discounts have remained unchanged thus far.

The BoC’s established position is that higher oil prices are a net positive for the Canadian economy. But the Bank also expects them to add to both growth and inflation pressure. That will reduce its appetite for additional near-term rate cuts. Increased US inflation risk will also give the BoC pause, because we import US inflation over time through trade.

Thus far, bond-market investors have reduced the odds of BoC rate cuts in 2026, and the consensus expects the Bank to remain on hold for the rest of this year. Based on recent events, I am inclined to concur with that outlook.

My Take on Today’s Mortgage Options

Fixed rates are on the rise. The best time to lock in a rate was last week. The second best time is now.

Three- and five-year fixed rates remain the most popular choices. When the spread between those two options is minimal, I think five-year fixed rates offer slightly better value.

Fixed rates now have increased appeal in today’s increasingly uncertain environment, but I still expect variable mortgage rates to produce the lowest borrowing cost over their full terms.

The BoC will likely look through the inflationary impact of higher oil prices for longer than bond-market investors. Also, at this point, I’m still hopeful that the war won’t persist – first and foremost for the sake of humanity, but also because of the negative economic impacts that will accrue if it drags on.

Fixed rates that are locked in won’t have the opportunity to be re-priced if circumstances change for the better. Variable rates will.

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).

Insider’s Tip for Borrowers

A borrower’s credit score can impact both the options and the rates that will be available to them.

If you pay your bills on time and don’t get over-extended, your credit score is probably fine. But if you have any blemishes, there are some simple and straightforward steps you can follow to improve your score.

To learn more, check out this post: Eight Ways To Improve Your Credit Score.

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.

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.

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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