Canadian households hoping for cheaper mortgages just got bad news. Hotter-than-expected inflation data has sent Government of Canada (GoC) bond yields soaring, wiping out any progress made in 2025. The move means higher fixed-rate mortgages are on the way, and they’ll climb further if yields continue to rise.
Government Borrowing & Your Mortgage Rate
Credit is market-based: Borrowers compete for capital from investors looking at similar risks and time frames. The Bank of Canada (BoC) overnight rate influences variable-rate mortgages since they’re both based on overnight borrowing. Fixed-rate mortgages move with GoC bond yields of similar lengths—i.e., a 5-year fixed-rate mortgage is a premium over the 5-year GoC bond yield.
Bond yields are based on supply and demand. Yields fall as available capital outpaces borrowing demand—you don’t pay a premium if everyone wants to lend you money. Conversely, yields rise when borrowing exceeds available capital, and borrowers pay higher interest to keep investors interested. It’s not discussed often, but this is why the scale of government debt relative to the economy is important.
Lenders then add a spread (risk premium) to the yield to cover operating costs, default risk, and profits. Canadian mortgage lenders generally add between 150-200 basis points (bps), depending on competition and risk at the time.
Mortgage Rates Set To Rise As Bond Yields Surge
Canadian bond yields are rising aggressively this week, as inflation expectations climb. The 5-year GoC bond yield rose 7.5 bps in intraday trading to 2.961% at noon, after adding 10.9 bps after yesterday’s inflation announcement. The yield has climbed 18.3 bps since last week’s close, and it’s only Wednesday.
All of the progress made in 2025 has rolled back and is now slightly higher than the year started (+2.1 bps). That said, this is still lower than this time last year (-69 bps). It’s just heading in the wrong direction from where most people are hoping.
Mortgage rates may not fully reflect the move, especially when it happens this fast. Based on recent history, one can expect a 5-year fixed mortgage between 4.46% and 4.96% based on this yield—depending on the market, lender, and demand.
Inflation Is Slipping Out of The Bank of Canada’s Control
Canadian bond yields are suddenly heading higher based on inflation expectations. Most people heard that inflation fell yesterday in response to the GoC dropping the consumer carbon tax, but that was only the headline data. The BoC-preferred CPI-core measures of inflation, which eliminate volatile and temporary influences, actually accelerated last month. Both of the central bank’s key CPI-core metrics are now above its inflation tolerance range.
Ironically, the BoC’s rush to cut rates quickly may prove counterproductive.
The bond rate rise is probably just started.It was expected even before Trump arrived. His antics have not helped .The US needs to sell a lot of bonds this year and buyers are wary. 6% mortgages are probably soon. Much higher rates than that are possible.Do wonders for the real estate market. If you think sales are bad now just wait
Interest rates MUST be lowered to support the housing market and support house prices.
Many Canadians DEPEND on the value of their house for their financial wellbeing and deserve to be supported.
Also, more numbers of international students should be increased to support the rental market.
As usual, the BOC made the wrong decision, to drop rates prematurely, as they did coming out of the pandemic – to keep rates too low for too long. The bias toward stimulus is eroding our currency, generating excess demand and thus re-accelerating inflation just when it was almost tamed.
It seems the BOC will never learn…
The average Canadian
owns a run down house
he can’t afford to repair.
House poor.
Let’s be clear, the affordability crisis has been brought on by the Liberal government’s relentless push to raise real estate prices by excessively lowering interest rates and de-risking bank loans (by raising CMHC insured mortgage threshold), which drove up real estate prices to unaffordable levels for legitimate buyers. Primarily investor buyers are now suffering a price re-set that should be absorbed by them and not tax payers. The only path to affordability now is a drop in real estate prices to 2019 levels and eventually lower interest rates.
The market needs to be allowed to re-set to a level that affords legitimate buyers the hope to own a home at a reasonable price point, or our social structure starts to implode.
Everyone needs to remember that the sole goal of the Bank of Canada is not the housing market; it’s just one aspect of its policy decisions. The primary focus is to protection the economy from recessions (ie business bankruptcies), make sure the Canadian Dollar stays competitive relative to the US dollar to stimulate exports, and lower interest rates help keep interest on the national debt. It’s a complex balancing act, so these factors need to be considered as well.
To help the housing market we need stronger regulations to discourage AirBnb (which makes housing into ghost hotels), and stricter CMHC requirements on second, third home investments.