How could the Iran conflict affect mortgage rates in Canada?

Are we already seeing the Iran conflict affect mortgage rates in Canada?

The war in Iran has driven up 5-year fixed rates in Canada by about 0.25%. Kind of surprising, but events around the world do affect mortgage rates here in Canada.

Once the Iran conflict escalated and oil transit through the Strait of Hormuz was restricted, oil prices jumped quickly to around $100 a barrel, a level we haven't seen since 2022. Almost one-fifth of all the world's oil (about 20M barrels daily) passes through this Strait, considered a 'critical oil transit chokepoint,' and the cut-off is already creating a growing shortage in the global energy supply.

Everything requires energy, and higher energy costs typically show up quickly for consumers, threatening to increase the inflation rate. Investors fear inflation because central banks typically raise the prime rate to fight it. That fear pushes up bond yields in anticipation of future prime hikes, and, in turn, fixed mortgage rates also rise. (Fixed mortgage rates are set in relation to bond yields.)

Just as Canadian gas prices rose quickly at the pump, Canadian fixed mortgage rates rose quickly once bond yields rose, as lenders scrambled to cover their cost risks.

Will it be a short-term rate spike, or something borrowers should treat as a new risk for 2026?

If the Strait of Hormuz remains closed or restricted, oil production and stockpiles worldwide are affected, potentially keeping oil prices higher than normal (or much higher, depending on the level of restriction).

Nations have agreed to release their oil reserves, which could temporarily lower oil prices. However, these reserves are limited — the longer the conflict continues, the longer it could take to restore trade volumes to normalcy, and the longer oil prices would remain higher.

If oil prices remain high, around $85/barrel for a few days, or longer:

• Can instantly lift gasoline prices, but temporary if the disruption is resolved in a few days
• For 1 to 3 months, headline CPI may see a rise of about 0.3%
• Over 3 months, or if oil hovers more consistently around $100, there could be stronger, broader inflationary pressure that could matter for rate expectations and central bank thinking.

How are home buyers reacting right now to the uncertainty created by the Iran conflict?

Currently, it's mortgage business as usual, though we have noticed this week that our clients are choosing a cheaper variable rate over higher fixed rates at about 2-1.

Does this kind of geopolitical shock change the fixed vs. variable mortgage decision?

The 3- and 5-year fixed-term rates have recently increased, while the variable rate is currently lower. Choosing a variable rate will immediately offer a better mortgage budget, and clients can usually lock into a fixed rate later, penalty-free, if they get nervous.

Some of our clients aren't up for the risk of potential variable-rate changes. In that case, they often feel more comfortable choosing a shorter fixed-rate term, hoping to renew sooner into better rates than with a 5-year term.

Could higher oil prices actually delay rate cuts from the Bank of Canada?

Yes, higher oil prices could delay BoC policy rate cuts if the energy shock pushes up inflation even as the economy is slowing.

Could the Iran conflict push fixed mortgage rates higher?

Yes, it could, depending on market reaction to what's happening in Iran.

A key indicator to watch is Government of Canada bond yields — they usually lead the direction of fixed mortgage rates. See how bond yields affect mortgage rates here.

What should Canadians focus on when making a mortgage decision in this environment?

I suggest focusing on the here and now and what you can comfortably afford, not where you think rates might be tomorrow or a month from now.

Mortgage rates can change quickly, and it can get maddening trying to time the market, even with the help of an expert broker. A mortgage is a big commitment, and leaving regret behind to settle your details can help you move on with a payment you can live with.

Whether you're buying a home or have an upcoming renewal, seek unbiased mortgage advice tailored to your situation to help you make clearer decisions — and to save the most.

How could the Iran conflict interact with existing trade tensions to affect mortgage rates?

Trade uncertainty has already been weighing on growth expectations — and the Iran conflict could push inflation risk higher.

On the other side of the barrel, however, higher oil prices are also good for Canadian GDP, as provincial and federal governments rake in extra revenue, provided global demand for Canadian crude is strong.

Yet, rising inflation will impact households nationwide, eat into consumer demand and weigh on growth. In the meantime, if U.S. trade goes sideways and Canada enters a recession while inflation is higher, the risk is stagflation — and the Bank of Canada will be put in the position of potentially raising rates despite economic hardship.

So an unstable combination of high energy prices and U.S. trade turmoil would only add to the rate uncertainty that Canadian home buyers and owners would face.

Have questions about how ongoing trade uncertainty could affect your mortgage decisions? Read Dan's trade-related Q&A here