How Inflation Is Impacting Canadian Mortgage Rates

Inflation has become one of the biggest drivers of mortgage rate movement in Canada. Whether you’re buying a home, renewing your mortgage, or refinancing, understanding the connection between inflation and mortgage rates is essential in today’s economic climate.

Here’s how inflation is influencing both fixed and variable mortgage rates — and what Canadians should expect in the months ahead.

📈 What Is Inflation and Why Does It Matter?

Inflation measures how quickly the cost of goods and services rises over time.
When inflation increases, the value of money decreases — and central banks must respond to keep the economy stable.

For mortgages, inflation is critical because it determines:

• Whether interest rates rise or fall

• How expensive borrowing becomes

• How much homebuyers can afford

• The direction of the housing market

🏦 How the Bank of Canada Responds to Inflation

The Bank of Canada (BoC) uses interest rates to control inflation.

When inflation is too high, the Bank of Canada:

✔ Raises the policy rate
✔ Makes borrowing more expensive
✔ Reduces spending and slows the economy

This leads to higher mortgage rates.

When inflation is falling, the Bank of Canada:

✔ Cuts the policy rate
✔ Lowers borrowing costs
✔ Stimulates spending and investment

This typically leads to lower mortgage rates.

🔄 How Inflation Affects Fixed Mortgage Rates

Fixed mortgage rates in Canada are influenced by the bond market, not directly by the Bank of Canada.

When inflation rises:

• Bond yields increase

• Lenders raise fixed mortgage rates

When inflation drops:

• Bond yields fall

• Lenders reduce fixed rates

In 2025, as inflation trends downward, fixed rates have already begun to ease.

📉 How Inflation Affects Variable Mortgage Rates

Variable mortgage rates move in direct response to the Bank of Canada’s policy rate.

High inflation → BoC raises rates → Variable rates increase

Low inflation → BoC cuts rates → Variable rates decrease

Many economists expect variable-rate relief later in 2025 if inflation continues to cool.

🧮 Inflation’s Impact on Mortgage Affordability

When inflation is high and rates rise:

• Mortgage payments increase

• Borrowing power decreases

• Stress test qualification becomes harder

• Housing demand slows

When inflation falls and rates decline:

• Payments become more manageable

• Buyers qualify for larger mortgages

• Refinancing becomes more attractive

• Housing demand often rebounds

Inflation indirectly shapes the real estate market by determining how expensive mortgages become.

🔍 Why Inflation Is Easing in Canada (2025 Update)

Several factors are contributing to lower inflation:
✔ Energy price stabilization
✔ Slower consumer spending
✔ Higher interest rates cooling demand
✔ Improved supply chain efficiency

Economists expect inflation to trend closer to 2–3%, creating a pathway for eventual rate cuts.

🏡 What Homebuyers Should Expect in 2025

If inflation continues to fall:

• Fixed rates will slowly decline

• Variable rate cuts may start later in the year

• Affordability will gradually improve

If inflation rises unexpectedly:

• The BoC may delay rate cuts

• Fixed rates may climb again

• Buyers may face another wave of affordability challenges

🔁 What Homeowners (Especially Renewals) Should Expect

Over 60% of Canadian mortgages will renew by the end of 2026. Inflation trends matter enormously for these borrowers.

If inflation falls:

• Renewal rates become more manageable

• Refinancing options improve

• More lenders compete aggressively on pricing

If inflation spikes again:

• Renewal costs may increase further

• Variable-rate borrowers feel immediate pressure

🧠 How to Protect Yourself in a High-Inflation Environment

✔ Lock in a rate if risk-averse

Fixed rates offer stability during inflation spikes.

✔ Consider shorter-term fixed rates

They keep you flexible if rates fall soon.

✔ Choose variable rates only if you can handle volatility

Variable rates may reward borrowers over time — but the path is bumpy.

✔ Use a mortgage broker

Brokers compare multiple lenders and identify the smartest timing.

✔ Build prepayment strategies

Paying down more principal protects you from long-term interest costs.

🚀 Final Thoughts: Inflation Will Shape Mortgage Rates in 2025–2026

Inflation remains the key driver of mortgage rates in Canada.
As long as inflation continues its downward trend, Canadians can expect:

• Easing fixed rates

• Potential variable-rate cuts

• Improved housing affordability

• Better refinancing opportunities

But if inflation resurges, rate relief may be delayed.

Staying informed — and choosing the right mortgage strategy — is essential in a market driven by economic uncertainty.