Sweet, black gold is flowing again, just as Canada hits peak mortgage renewal season. BMO Capital Markets says the recent Hormuz Strait deal is pulling Government of Canada (GoC) bond yields lower, though fixed-rate borrowers may see little of it. The bank says variable rates still look like the better option.
Bank of Canada, Government Bonds, and Your Mortgage Rates
The real estate industry fixates on Bank of Canada (BoC) rate decisions, but those only move variable rates—a minority of Canadian mortgages. The vast majority of outstanding mortgage debt is fixed-rate, benchmarked to GoC bond yields of similar terms. For example, the 5-year GoC bond yield sets the foundation that the 5-year fixed-rate mortgage is built on.
Those yields are driven by inflation expectations and the relative supply of public debt vs. investor capital. More debt than capital pushes borrowing costs up; more capital than debt pulls them down.
Falling Oil Prices Are Driving Government of Canada Bond Yields Lower
Source: BMO Capital Markets.
The Iran War sparked a surge in energy prices, as nearly 20% of the world’s crude supply was throttled. This helped send inflation higher in Canada, driving yields higher. Now with a working deal in place, crude is flowing once again, and oil prices are falling sharply. That’s likely to ease inflation pressure ahead, and it’s already pulling bond yields lower.
“The slide in oil prices has pulled down Canadian GoC yields, with the 5-year down just over 30 bps now since mid-May,” says BMO senior economist Robert Kavcic.
“Good news for mortgage borrowers and renewals? More like, less bad news,” he notes. “Keep in mind that fixed mortgage rates were likely to grind higher with some lag versus the move up in yields, so the Iran deal and oil price selloff more or less just take that upside off the table at this stage.”
In plain English? The threat materialized and dissolved before lenders had time to act on it.
A Half-Christmas Miracle: Canada’s Mortgage Renewal Wave Peaks This Month, Second Half To Be More Tame
Source: BMO Capital Markets.
In a previous note, BMO estimated roughly 1.8 million mortgages would renew in 2026. The second half of the year will be relatively light, with the vast majority of those renewals in the first half—peaking this month, before dropping off sharply.
“With peak renewal volumes coming in right about now, Canadians are still finding the lowest and most stable rate in the variable space. And we suspect that will be the case for the rest of the year with the BoC on hold,” says Kavcic.
Less bad news is basically good news in Canada at this point. Good article.
I wouldn’t get a 5 year variable rate mortgage by any means, but variables are what you hit when there’s uncertainty.
Not always. Have to factor in the Government is making so much supply taxpayers are buying $60B/year to support artificially cheap rates that weak buying activity will boost resales.
You guys have any estimates on how much the mortgage bond buying is going to cost taxpayers? They realized the average person should probably have guardian care, and started using opaque forms of debt transfer to hide the actual costs.
That’s like the air canada thing. “it’s not a bailout, we’re just overpaying for equity to boost its prices at the margin, and giving them money to make sure their books are clean so we ‘make a profit’ on the stocks.”