Interest Rates: It’s Not Just the Bank of Canada

There’s a question I’m hearing more and more:

Why are mortgage rates going up when the Bank of Canada hasn’t raised its overnight rate?

The answer has a lot to do with the bond market.

Canadian 5-year bond yields jumped about 20 basis points in one week, reaching their highest level since the second quarter of 2024. Mortgage brokers are already reporting lenders increasing fixed rates.

So, what’s going on?

Inflation is back in the conversation

Energy prices are a big part of the story.

Canadian diesel prices are at record highs, and higher energy costs don’t just affect what we pay at the pump. They work their way into transportation, food and other goods and services.

At the same time, inflation has been firmer than expected. That has caused markets to rethink where interest rates may ultimately have to go.

And when markets expect higher rates in the future, bond yields tend to move higher today.

The U.S. matters too

Canadian mortgage rates don’t operate in isolation.

U.S. inflation, Federal Reserve policy and U.S. government bond yields all influence global bond markets, including Canada.

The recent increase in energy prices and inflation has caused markets to significantly reprice expectations for U.S. rates. There’s also growing concern about government borrowing and deficits, which means investors are demanding more return to hold longer-term bonds.

That pressure is showing up here in Canada as well.

What does this mean for mortgages?

This is the important part.

The Bank of Canada controls the overnight rate, but fixed mortgage rates are heavily influenced by bond yields.

That’s why fixed mortgage rates can move higher even when the Bank of Canada hasn’t made a move.

Markets are currently pricing in five Canadian rate increases over the next year, with the first potentially coming as soon as next month.

That is a market expectation, not a prediction or guarantee, and these expectations can change quickly.

But it does tell us that the assumption that rates will simply keep falling is no longer as certain as it was a few months ago.

What I’m watching

The other interesting piece is mortgages themselves.

The 5-year fixed rate is currently about 70 basis points above the variable rate, the widest spread since mid-2022.

As a result, more borrowers have been choosing variable mortgages. Floating-rate loans now represent about 36% of outstanding mortgage debt, above the previous high reached in 2022.

That’s something to watch if rates start moving higher.

There is some good news, though. Canadian household net worth increased 2.9% in Q2, reaching a record high, while mortgage borrowing fell 12.4% quarter over quarter.

So this isn’t a story of everything suddenly falling apart.

It’s a story about expectations changing.

The Bottom Line

For anyone in the real estate market, I think the lesson is simple:

Don’t watch just the Bank of Canada. Watch the bond market.

Inflation, energy prices, U.S. rates and government borrowing are all influencing where mortgage rates go next.

And if you’re a buyer who is considering making a move over the next few months, it may be worth reaching out to a mortgage broker now and exploring whether a rate hold makes sense for you.

A rate hold can provide some protection against a potential increase while you continue to figure out your timing and what you want to buy. It doesn’t mean you have to transact today. It’s simply another tool worth understanding in a changing rate environment.

For homeowners with variable mortgages, it’s also worth understanding how much exposure you have if rates move higher.

And if you already have a mortgage rate hold, now is a good time to understand exactly what that hold gives you and when it expires.

Interest rates are back in the conversation, and they’re going to remain an important part of the real estate story.