It wasn’t so long ago Canadians were talking about mortgage costs and property prices as one of the nation’s most pressing concerns.
Times move quickly, however. Now conversation has swung to the possible impact of tariffs from the United States, and our economic wellbeing (not to mention this year’s coming election and changes at the top of government).
At the time of writing, we’re facing a 25% impost by the US on aluminium and steel from March 12, 2025.
It’s not impossible a blanket 25% might be put on all Canadian goods exported to the US in the next few months. While the US has retracted this threat, it remains a possibility.
Tariffs of whatever nature will likely have an impact on our economy, interest rate and housing market. So, if you’re thinking of selling or buying, let’s try to join a couple of dots to connect these facets of our economy.
The relationship between tariffs and the mortgage rate is complex but boils down to how tariffs affect the overall economic climate, which influences the Bank of Canada’s decisions.
These factors also affect bond yields.
That’s important because lenders use bond yields, especially government bonds, as a benchmark for setting interest rates for fixed-rate mortgages.
Government bonds are considered relatively safe investments, so their yields provide a baseline for other interest rates.
Here’s where it gets a bit tricky: Bonds and mortgages compete for the same pool of investment funds.
When bond yields rise, they become more attractive than mortgages. So, lenders push up mortgage rates to compete against bonds for the available pool of investment.
Linked to this, lenders use bond yields to determine the appropriate mortgage rate for a given period. That’s how the cost of fixed-rate mortgages is determined.
So, if you’re trying to track the commentary on how the possibility of a tariff war might impact you, here are a few key points:
Connected: The relationship between bond yields and mortgage rates is generally direct: when bond yields rise, mortgage rates tend to rise, and vice versa.
Key Influence: The 5-year government bond yield is closely watched, as it serves as a common benchmark for 5-year fixed-rate mortgages.
It’s the Economy: Economic conditions, such as inflation and economic growth, influence both bond yields and mortgage rates.
Tariff Impact: If tariffs slow our economy, the Bank of Canada may cut interest rates deeper than its 3% level. While that sounds like good news, it will be responding to economic malaise. Rock-bottom rates probably won’t super-charge the real estate market as it did during Covid.
Not Personal: Finally, Canada is not the only one in the firing line when it comes to steel and aluminium tariffs. Argentina, Australia, Brazil, the 27 EU members, Japan, Mexico, South Korea, Ukraine and the UK are also affected.