Canada Hits Back

Trade talks between the US and Canada broke down over the weekend. As a result, the additional US tariffs recently threatened by US President Trump will now take effect. Prime Minister Carney has committed to responding in kind, and Canada’s retaliatory tariffs will kick in on September 8.

According to our Prime Minister, talks broke down when the US insisted on material last-minute changes that made the terms untenable. Those bad-faith tactics also exacerbated concerns that the US would honour the terms of the agreement if it were finalized – with Prime Minister Carney quipping that the US signs everything “in pencil” these days.

The Canadian response thus far has included near universal support for the decision to withdraw from the negotiations. For my part, I think that if economic pain caused by the US administration is inevitable (which it appears to be), we are better to suffer it by standing up to the bully than by cowing to him.

Trade talks will undoubtedly resume at some point, but the Trump administration’s immediate response will be straight out of its well-established playbook. More bluster and more threats.

So far, US strong-arm tactics have only hardened our collective will. I think that demonstrating our willingness to walk away will help level the playing field during future discussions.

What This Means for Our Mortgage Rates

GoC bond yields continued to move higher last week alongside both their US Treasury equivalents and global bond yields in general.

Investors are demanding a greater risk premium on longer-term debt to compensate for increased uncertainty tied to geopolitical instability, excessive government borrowing, and the overall inflation risk.

US Treasury Secretary Scott Bessent tried to counteract the upward pressure on longer-term US Treasury yields by announcing that it will double its purchases of long-dated US debt last Wednesday. But unusually, his announcement has had virtually no lasting impact thus far.

The latest trade-war escalation may push our benchmark five-year GoC bond yield lower this week, but the general uptrend in longer-term global yields will likely re-exert itself before long.

Some lenders raised their fixed mortgage rates last week in response to the recent slow-but-steady grind higher in our bond yields. Don’t expect these lenders to be in a hurry to cut if bond yields start the week lower. Lenders are typically slow to react to such negative economic shocks.

Variable-rate mortgage discounts held steady last week.

The BoC may not reduce its policy rate at its upcoming meeting on September 2. The likelihood that its next move will be a cut has now substantially increased following last week’s trade-war escalation.

It’s true that Canadian tariffs on US imports will increase the cost of those imports directly, but the Loonie will likely weaken in the immediate aftermath and raise all our import prices more broadly. The Bank of Canada (BoC) will often look through these types of one-time impacts, and it can afford to do that now with our core inflation measures now almost bang on 2%.

Furthermore, the Bank has stated a willingness to “cut the policy rate further to support economic growth” if the US imposes new trade restrictions. Those are now in effect.

My Take on Today’s Mortgage Options

Global bond yields and the fixed mortgage rates that are priced on them have been grinding higher of late, and that trend appears likely to continue.

While I expect that we will see a near-term drop in GoC bond yields this week, I will be surprised if it has much immediate impact on our fixed mortgage rates.

Three- and five-year terms remain the most popular choices. The spread between these two options will likely widen steadily over the remainder of this year as bond-market investors push term premiums higher. For as long as that spread remains relatively narrow, I think five-year terms offer better relative value.

While I appreciate the appeal of fixed-rate stability in our current volatile environment, I continue to believe that variable rates will likely prove cheaper over their full terms.

(Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs and, in some cases, higher payments.)

The BoC continues to look through our recent inflation spike because it has thus far been limited to surging energy prices. If the US/Iran war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank will be compelled to tighten.

I don’t think we will get to that point soon.

Meanwhile, our escalating trade war with the US increases the likelihood that the BoC’s next move will be a cut. To reiterate, in June, the Bank stated a willingness to “cut the policy rate further to support economic growth” if the US imposes new trade restrictions. We are there now.

Insider’s Tip for Borrowers

Your income is the single most important factor on your mortgage application because it confirms your capacity to pay, which is the most reliable indicator of a loan’s overall risk.

This post details the two key income tests that are used by lenders, outlines the basic income documentation that will typically be required, and offers advice on how to put your best foot forward.

Three Posts Every New Visitor to My Blog Should Read

1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?

This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.

2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties

For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender

3. What’s in the Fine Print

This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.) 

David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.

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