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The Bank of Canada just hiked its trendsetting policy rate for the first time in three years, and that means mortgage rates are on the move for some Canadians.
The central bank raised its benchmark rate by a quarter of a point to 2.5 per cent on Wednesday. Bank of Canada Governor Tiff Macklem says more hikes could be coming if inflation — which is largely linked to rising fuel costs — persists in the months ahead.
Canada’s major banks are already responding by raising their prime interest rates in step with Wednesday’s decision. All five of Canada’s major banks raised their prime rates by a quarter point to 4.70 per cent. That’s the rate they offer their most credit-worthy customers.
Variable rate mortgages will increase first, as they are directly linked to the issuing bank’s prime rate.
Rates for new fixed mortgages are linked to the bond market. When a central bank raises interest rates, newly issued bonds offer higher payouts. As investors demand higher yields, lenders increase mortgage rates to maintain their profit margin.
“In a rising rate environment, choosing whether to go fixed or variable can be really challenging. Variables are lower, and provide flexibility, but future rate increases need to be budgeted for,” Clay Jarvis, a mortgage expert at Ratehub.ca, stated in a press release after Wednesday’s rate announcement.
“Fixed rates are elevated, but once you qualify your mortgage costs are set. That kind of stability can be worth paying a premium for,” he added.
Bank of Canada Governor Tiff Macklem speaks during a news conference on Wednesday in Ottawa, where the central bank’s governing council decided to hike interest rates by a quarter per cent. (Adrian Wyld/The Canadian Press)
Speaking to reporters in Ottawa on Wednesday, Macklem acknowledged that rising interest rates could be uncomfortable for many Canadians and businesses.
“Look, we get it,” he said. “It’s not going to feel good immediately, but that’s how you get inflation back down, and that will feel good for Canadians and Canadian businesses.”
Variable rate mortgage holders will feel it most
The Bank of Canada’s first rate hike since July 2023 will be immediately felt by variable rate mortgage holders. Toronto-based broker Marcus Tzaferis says that change could be significant.
On a $500,000 mortgage, a rate hike of 25 basis points would add about $70 per month on average to a holder’s monthly payments. It might not sound like a lot, but, Tzaferis said, “to a consumer that’s already stretched, these 25 basis point incremental increases are going to have an impact.”
The central bank also signalled that more rate hikes could be on the horizon — and if the bank hiked rates by another 50 or 75 basis points, Tzaferis said, “you can see how that will affect people’s monthly budgets.”
Because rate hikes were expected, Tzaferis says he’s already been fielding calls from Canadians trying to assess their options.
Barbara Best stands in the kitchen of her Toronto condo on Wednesday. She recently switched from a variable to a fixed rate mortgage and says the price increase is worth it for the peace of mind. (Laura MacNaughton/CBC)
Like Barbara Best. She’s had a variable rate mortgage on her Toronto condo since 2022 — the same year the Bank of Canada began a long cycle of rate hikes — but recently renegotiated to a fixed rate months in advance of when her mortgage was up for renewal.
Because fixed rates are currently much higher than variable ones, that means she’s paying a lot more each month, but Best says it’s worth it.
“It was a jump in payment but it gives me that certainty. It gives me that peace of mind,” Best said.
Tzaferis says “now is the time” to shop around for a fixed rate mortgage if holders want to get out of a variable one, or if their mortgage is coming up for renewal soon.
“The kind of most critical thing is for Canadians to start their renewal process early,” Tzaferis said. Being aware of what the best rates on the market are and getting the conversation started with an adviser could help consumers make a choice that’s right for them, according to Tzaferis.
Hike could pour more cold water on housing market
The hike also stands to worsen the already soft housing market.
Deputy governor Carolyn Rogers said Canada’s housing market is already struggling, particularly in Ontario and British Columbia, and the rate increase will add to those pressures.
Bank of Canada senior deputy governor Carolyn Rogers, speaking after the central bank hiked a key interest rate, said the organization’s outlook for housing is ‘pretty subdued’ for a few reasons, including overall economic uncertainty.
Wednesday’s rate hike shrinks the pool of eligible buyers, shifting power from sellers to those who can qualify for the financing needed to make a purchase. Home prices could dip lower.
Earlier this month, the Canadian Real Estate Association (CREA) cut its forecast for 2026 home sales for the third time this year.
Joel Fox, chief operating officer of Toronto-based real estate law platform Ownright, agrees that Wednesday’s rate hike will add to the dour mood in the housing market.
“A rate hike likely locks us into year-over-year declines in housing activity for the rest of this year and into next, and I don’t see things turning until there’s a rate drop,” he said in a statement after Wednesday’s rate decision.
“The market was already as bleak as we’ve seen in a long time. The only saving grace is that it’s hard to imagine it dropping much further.”
