How the Middle East war is already affecting mortgage rates in Canada
The Middle East war is having an impact on something most Canadians might not have expected: the cost of some mortgages.
Last month, three- and five-year fixed mortgages rose 0.5 per cent in just three weeks, said Marshall Tully, a Toronto-based mortgage broker.
“Unfortunately, it’s possible the trend may continue,” Tully said.
According to the Canada Mortgage and Housing Corporation (CMHC), 1.4 million mortgages will be renewed by the end of the year, which is about 23 per cent of all mortgages. Many of them will receive much lower rates from 2021.
“A lot of people are going into their renewals completely blind and thinking rates are just going to stay down or steady,” he said.
Tully said fixed-rate mortgages have grown particularly rapidly because they are backed by bond yields, which can fluctuate in response to world events such as war. And US President Donald Trump’s prime-time address on Wednesday offered little new information about how long he expects the conflict to last.
“Some lenders, who had been delaying raising rates because it looked like there might be ceasefire talks, moved forward with raising rates after his speech.”
‘uncertainty premium’
The Bank of Canada’s key interest rate – currently 2.25 per cent – was set in October 2025 and has been maintained in all subsequent announcements since then.
Before the war began, further cuts were predicted this year. Tal says that now the forecast has changed.
Along with the war and Iran’s closure of the Strait of Hormuz, ongoing U.S. tariffs are also impacting fixed-rate mortgages in Canada, he said.
“I believe the five-year fixed rate is already too high for this slowing economy.”
Mark Ting, partner at Foundation Wealth and personal finance columnist at On the Coast, said mortgage rates are based on bond markets — and bond yields are rising because of rising energy prices because of the war in the Middle East.
However, banks will raise rates to avoid a decline in future lending, especially long-term lending.
A few weeks ago, the average rate on a five-year fixed mortgage was closer to four percent, Tully said. As of April 2, it stands at 4.95 percent, while the three-year rate stands at 4.59 percent. This compares with the average variable rate, which is 4.2 percent.
Inflation is also expected to rise in March, said Moshe Lander, senior economics lecturer at Concordia University. This is the first full month that Iran has effectively closed the Strait of Hormuz, one of the world’s most important maritime chokepoints.
“The longer this goes on, the more uncertain U.S. policy will become, and that uncertainty will spill over into the cost of Canadian goods and services,” he said.
“As inflation spreads through the economy, the Bank of Canada will have to raise interest rates.”
Lander said there are new expectations for three BoC rate hikes by the end of the year and Trump’s non-committal speech on Wednesday has further worsened the prospects.
“Banks will have to price in uncertainty in those situations – and so mortgage holders will continue to face an ‘uncertainty premium’ in their rates.”
Benjamin Tal, deputy chief economist at CIBC World Markets, echoed the sentiment.
“If you’re upset that the five-year fixed mortgage rate you were expecting has gone up, you can blame Trump for it.”
long lasting effect
Both Tal and Lander agree that even if the war ends tomorrow, it will take several months for both oil and gas prices to stabilize, meaning inflationary pressures will continue.
So what’s the best thing to do if you’re renewing or starting a mortgage soon? It depends on who you ask.
Tully advises that now is a good time to set a new rate.
“The easiest thing you can do is hold rate – and a lot of people don’t realize they have the ability to do that.”
If you’re in a position to switch banks, most lenders will offer a 120-day rate, which will reduce if rates remain the same within that time frame. If you stay with the same bank, you can usually only do this 30 days in advance.
Tal says it’s worth trying to buy something for yourself if possible before committing to a long-term mortgage.
“The Canadian economy is right now on the verge of 0 per cent GDP growth, very close to recession – this is not typically an environment where we would see rates being raised.”
In his first public address since the start of the US-Israeli war against Iran, US President Donald Trump touted his achievements in the conflict and said it would end within weeks. He also praised US allies in the Middle East.
Lander says mortgage holders need to protect themselves more than ever.
“Contact a financial planner; contact your bank. The biggest misconception is that banks are out to get you, but if you contact them early in the process, they will work with you to make sure you don’t have to sell your home.”
Options may include increasing amortization, shortening or extending the term, or possibly suspension of interest.
Overall, the CMHC has a positive outlook on how Canadian homeowners have handled fluctuating rates, saying in a written statement to CBC that they have proven “remarkably resilient” given the challenges.
