How to choose a mortgage rate in war time

Open this photo in gallery:

It’s been a volatile week for markets, and the geopolitical upheaval stemming from the war in the Middle East is also affecting Canadian interest rates.

And while data suggests investors are wise to hold off on major decisions during war time, borrowers who need a mortgage rate now probably don’t have the time to wait this conflict out.

The factors that influence mortgage rate pricing are currently all pointing upward. Inflation – which the Bank of Canada only recently wrestled back down from pandemic-era highs – may spike again if the war keeps energy prices elevated for an extended time.

That will pressure the world’s major central banks – particularly the U.S. Federal Reserve, but also the BoC – to increase borrowing rates, even if economies are sagging.

The history of war suggests investors should do nothing

This would cause variable mortgage rates, which move in tandem with the BoC’s benchmark rate, to rise, in a pivot from forecasts that Canadian interest rates would remain largely stable in 2026.

Fixed mortgage rates are also not immune to the pressures of war. In times of uncertainty, investors usually pile into bonds, which are viewed as safe haven investments as yields are backed by stable governments. These bond yields are used by lenders to set the price of fixed mortgage rates.

Bond yields and prices move inversely to each other: When yields are high, it indicates investors need a higher payout to take on new associated risk, which devalues the bond overall.

But a general malaise has been brewing toward bonds and particularly to the U.S. 10-Year Treasury – considered the global benchmark for yields – owing to President Donald Trump’s erratic trade policy. Layer on war-induced risk of higher inflation and interest rates, and bond investors have been selling.

Canadians may pay more for gas because of Iran war, but oil glut could curb price hikes

Yields have ticked up steadily for the U.S. 10-year note over the past week, in turn influencing key Canadian bonds, such as the Government of Canada five-year yield.

That means fixed mortgage rates are already set to rise in the short term, and that pressure will grow the longer the conflict in the Middle East lasts.

The message for today’s mortgage shopper is simple. Now isn’t the time to bet on rate cuts. If you like where today’s rates are, lock in fast.

I frequently suggest taking out a pre-approval and rate hold. It’s truly the most effective way to make a proactive choice about your mortgage. In the near term, it provides shelter from market volatility, as you’ll have access to today’s rate pricing for up to 120 days while you sort out your mortgage deal. On the odd chance rates drop during that time period, you’ll get that lower pricing, while being shielded from any rate increases.

From inflation to mortgages, six ways the Iran war could affect your wallet

The second crucial decision for borrowers is the type of mortgage to choose, and this comes down to risk tolerance and where you think rates may trend over the next few years.

Five-year fixed terms are the most popular in Canada for a reason. Not only are they often priced the most competitively but borrowers don’t have to think about how their rate or payment may change for five whole years. That peace of mind can go a long way amid all of the current uncertainty. If you think rates will rise, going fixed is a smart move.

For borrowers who remain confident that rates could still fall, a variable option can provide great value, provided you have the stomach – and the strategy – for change.

Variable mortgage terms are much cheaper to break than a fixed – just three months of interest – and so borrowers who are willing to eat that cost can switch to a fixed rate if they need to get off the floating-rate train.

It’s a gamble that fixed rates will still be competitive at that time, but given variable rates are currently the cheapest option in Canada, you might save on interest costs.

Penelope Graham is the head of content at Ratehub.ca