Fixed mortgage rates in Canada have been trending upward over the past week, largely due to a rebound in bond yields triggered by stronger-than-expected economic data. Both U.S. and Canadian developments are contributing to the shift, prompting lenders to raise rates on several popular mortgage terms.
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Bond Yields Are Leading the Way
The latest uptick in fixed mortgage pricing is being closely tied to the movement of government bond yields—particularly the 5-year Government of Canada (GoC) bond, which crossed the 4% threshold. This was influenced by a similar rise in U.S. Treasury yields, following the release of inflation data that came in hotter than expected.
Since Canadian bond yields tend to follow U.S. trends closely, the ripple effect has created upward pressure on mortgage pricing domestically. Some lenders have already responded by raising their fixed rates, particularly on 3- and 5-year terms.
Canadian Employment and Inflation Add to Market Pressure
Canada’s strong June employment report added further fuel to the upward momentum in bond yields. While not necessarily altering the Bank of Canada’s short-term outlook for rate changes, the economic strength signaled reduced urgency for rate cuts in the immediate future.
June’s inflation numbers also reinforced that view. Statistics Canada reported a slight increase in the annual inflation rate to 1.9%, with core inflation proving to be more persistent than many had hoped. This hardened expectations that the Bank of Canada would hold its benchmark rate in its upcoming July 30 decision.
What This Means for Borrowers
The bond market’s reaction to inflation and jobs data has already translated into mortgage rate hikes by several lenders. Increases ranged from 5 to 10 basis points (0.05% to 0.10%) and could continue further if bond yields remain elevated. These movements directly affect new borrowers and anyone looking to renew their mortgage soon.
Analysts Weigh In: More Short-Term Rate Pressure Ahead
Mortgage broker Dave Larock noted that many lenders raised rates in response to bond yield movements, confirming a short-term upward bias in fixed mortgage pricing.
Ron Butler of Butler Mortgage pointed to broader global factors—such as rising government deficits and increased fiscal spending—that are contributing to upward pressure on long-term yields. “The spectre of growing government deficits all over the world is creating capacity concerns,” he said, suggesting that 3- to 5-year fixed rates will likely stay in the 4% range for the coming months.
Bank of Canada Rate Outlook: A Hold for Now, Cut Later?
Although bond yields are on the rise, the Bank of Canada is widely expected to hold its key interest rate at the end of July. That would mean no changes for existing variable-rate mortgage holders or those with Home Equity Lines of Credit (HELOCs).
Ron Butler sees little chance of a rate cut in July or September but remains optimistic that one could come in October or December, especially if economic conditions weaken as expected.
Choosing Between Fixed and Variable: A Closer Look
Despite the recent hikes, fixed mortgage rates are still below their historical average. The gap—or “term premium”—between different fixed-rate terms is starting to reappear, but many popular term lengths, like the 3- and 5-year, remain closely priced.
Larock says when these terms are similarly priced, he continues to recommend the 5-year fixed option for its added stability. That said, he acknowledges that variable rates could still offer the lowest overall borrowing cost—if rate cuts arrive on schedule.
Important Considerations for Variable-Rate Borrowers
Variable-rate mortgages may deliver savings over time, but they come with uncertainty. Larock advises borrowers to only choose a variable rate if they have the financial flexibility to withstand short-term volatility and the potential for temporary increases in monthly payments.
Final Thoughts: Stay Informed and Be Flexible
As bond markets continue to respond to inflation and employment data, borrowers should prepare for a potentially prolonged period of rate fluctuations. Whether you’re considering a fixed or variable mortgage, staying informed and flexible will be key to managing borrowing costs in this evolving landscape.