|
For Canadian homebuyers, the mortgage market could become more challenging as rising inflation risks put upward pressure on borrowing costs.
Recent economic developments suggest that fixed mortgage rates may continue to face pressure, with the five-year fixed mortgage rate potentially moving above 5 per cent. While the broader economy has shown signs of strength, tariffs, higher energy prices and renewed inflation concerns could influence the interest-rate outlook in the months ahead.
What’s Driving Mortgage Rates Higher?
One of the key factors to watch is inflation. When inflationary pressures increase, bond yields can rise, and fixed mortgage rates often move in the same direction.
The Canadian economy also posted a strong rebound in the second quarter. However, that momentum is expected to moderate as tariffs weigh on exports and contribute to some additional inflationary pressure.
For buyers, this means that even if the Bank of Canada’s overnight rate remains unchanged, fixed mortgage rates may not necessarily stay where they are today.
What This Could Mean for Homebuyers
A potential move above 5 per cent for five-year fixed mortgage rates could have a meaningful impact on borrowing costs, particularly for buyers who are purchasing at higher price points or carrying larger mortgages.
For example, even a relatively small increase in the mortgage rate can add to monthly payments and the total interest paid over the life of a mortgage.
This makes it increasingly important for buyers to consider more than just the purchase price when determining what they can comfortably afford. Buyers should also account for their mortgage rate, down payment, monthly carrying costs and potential changes when their mortgage comes up for renewal.
Could the Bank of Canada Raise Rates?
The current baseline expectation is that the Bank of Canada’s overnight rate will remain unchanged through 2026. However, the risk of an earlier rate increase has increased if energy prices remain elevated and inflation expectations continue to rise.
That distinction is important for buyers. A stable overnight rate does not guarantee that all mortgage rates will remain stable. Fixed mortgage rates are influenced by bond-market conditions and broader economic expectations, while variable mortgage rates are more directly connected to the Bank of Canada’s policy rate.
What Should Buyers Do Now?
For buyers who are actively shopping for a home, the changing rate environment is a reminder to build some flexibility into their budget.
Consider:
- Getting pre-approved: A pre-approval can help establish a realistic price range before you start making offers.
- Stress-testing your budget: Consider whether you could comfortably manage a higher mortgage payment if rates increase.
- Comparing fixed and variable options: Each type of mortgage responds differently to changes in interest rates.
- Looking beyond the monthly payment: Consider the total interest cost, mortgage term and renewal risk when comparing options.
- Allowing room in your budget: Avoid stretching your finances to the maximum amount a lender may approve.
The Bottom Line for Buyers
The outlook for mortgage rates remains closely tied to inflation, economic growth and financial-market expectations. While the current baseline calls for the Bank of Canada’s overnight rate to remain unchanged through 2026, increased inflation risks could put further pressure on borrowing costs.
For homebuyers, the key takeaway is to focus on affordability and flexibility rather than trying to predict exactly where mortgage rates will be next. A mortgage that remains manageable under different rate scenarios can provide greater financial flexibility as economic conditions evolve.
|
