With all the ups and downs in the stock market, changing interest rates, and economic policies like tariffs, I’ve had a lot of clients reach out wondering how this all impacts their mortgage. Because of this, I decided to write this article to break things down a bit:
1. How the Stock Market Affects Mortgage Rates
Before we get into it, let me explain what a bond is. A bond is like a loan you give to the government, and they pay you back with interest over time.
A bond yield is the amount of money you earn from a bond, shown as a percentage.
Imagine you have $1,000 to invest. You have two choices:
- Buy a bond that pays you 5% interest per year.
- Give it to a bank to lend out as a mortgage.
Now, bond yields (interest rates on bonds) go up to 7%.
If you can get 7% guaranteed from a bond, why would you accept only 5% from a mortgage?
To compete, banks have to raise mortgage rates, so investors who invest in mortgages still choose mortgages.
That’s why when bond yields go up, fixed mortgage rates go up too.
Think of investors like shoppers. When they’re excited about making money in stocks, they “shop” there and ignore safer investments like bonds. This pushes stock prices up and bond prices down, which in turn makes bond yields go up. Mortgage lenders watch these bond yields closely—when they rise, fixed mortgage rates usually rise too.
But when the stock market drops or feels risky, investors rush back to bonds for safety. This pushes bond prices up, yields down, and fixed mortgage rates tend to follow.
2. Trump’s Tariffs and What They Mean for Canada
Tariffs are basically extra taxes on imported goods. When Trump puts tariffs on Canadian products, it has a ripple effect:
- Canada sells less to the U.S. because tariffs make Canadian goods more expensive.
- Canada buys less from the U.S. if we respond with our own tariffs.
- The Canadian dollar weakens as trade slows down.
- Companies struggle and lay off workers.
- Prices go up (inflation) because imported goods cost more.
All of this can hurt the economy and push interest rates down as the Bank of Canada tries to keep things stable.
3. What This Means for Your Mortgage
If the economy struggles due to trade conflicts, the Bank of Canada may lower interest rates to help businesses and consumers. If you have a variable mortgage or secured line of credit, this could mean lower payments.
Right now (as of February 2025), rates are already on their way down, and further cuts are expected if economic conditions worsen.
4. Fixed vs. Variable Mortgages – The Key Difference
Many people think fixed and variable mortgage rates are connected, but they’re not:
- Fixed mortgage rates follow bond yields, as explained above.
- Variable mortgage rates follow the Bank of Canada’s interest rate, also known as the Policy Rate or in terms of banking the Prime Rate.
This means fixed and variable rates don’t always move together.
Check out my previous article for a more in depth explanation.
The Bottom Line
Whether you have a fixed or variable mortgage, being aware of how these factors interact can help you make better financial decisions. As we move forward, keeping an eye on trade developments, central bank policies, and broader economic indicators will be key to navigating the evolving mortgage landscape.
Still have questions? Feel free to reach out!
