War, Oil, and Mortgage Rates What Happens Next?
Whenever a major geopolitical event happens—like rising tensions or conflict involving Iran—one question almost always comes up:
“What does this mean for mortgage rates?”
It’s a great question, and the answer isn’t as straightforward as people expect. In fact, war tends to create two completely opposite forces on interest rates at the same time:
One force pushes rates down
The other pushes rates up
Understanding how these forces interact can help you make smarter decisions when planning a mortgage, refinancing, or home purchase.
Let’s break it down.
1. War Often Slows the Economy (Which Pushes Rates Down)
When geopolitical conflict escalates, uncertainty spreads quickly through the global economy.
Businesses become more cautious. Consumers pull back spending. International trade slows.
This often leads to:
Businesses delaying investments
Consumers reducing spending
Slower global trade and economic activity
When economic growth weakens, central banks typically respond by lowering interest rates to stimulate the economy.
Lower rates encourage:
Borrowing
Business investment
Consumer spending
So from an economic growth perspective, war actually increases pressure for central banks—like the Bank of Canada—to cut interest rates.
2. But War Can Also Create Inflation (Which Pushes Rates Up)
At the same time, geopolitical conflict can disrupt energy supplies and global shipping routes.
Iran is particularly important in global energy markets because it sits near the Strait of Hormuz, one of the most critical oil shipping lanes in the world.
Approximately 20% of global oil shipments pass through this corridor.
If supply in this region becomes disrupted, several things can happen quickly:
Oil prices rise
Gas prices increase
Shipping costs jump
These cost increases push inflation higher globally.
We saw a similar situation during the Russia-Ukraine War, when energy and food prices surged due to supply chain disruptions.
When inflation rises, central banks become less likely to cut interest rates quickly, because lowering rates can fuel even more inflation.
So now we have two competing forces:
Economic slowdown pushing rates down
Inflation pressure pushing rates up
Financial markets are constantly trying to determine which force will dominate.
The Three Phases Markets Go Through After Geopolitical Shocks
Bond markets usually move through three distinct phases when geopolitical conflict begins.
Phase 1: Panic (Investors Buy Bonds)
When uncertainty spikes, investors rush toward safe assets like government bonds.
This surge in demand causes:
Bond demand to spike
Bond yields to fall quickly
For example, during the initial shock, the Government of Canada 5-year bond yield dropped to roughly 2.6% as investors moved capital into safer investments.
Since fixed mortgage rates are closely tied to government bond yields, this can temporarily push mortgage rates lower.
Phase 2: The Real Assessment
Once the initial panic fades, markets begin asking deeper questions.
Investors start evaluating:
What will happen to oil prices?
Will inflation increase?
How long might the conflict last?
If oil prices rise significantly, inflation expectations increase. Investors then demand higher bond yields to compensate for inflation risk.
That’s why bond yields later rebounded to roughly 2.9%.
Phase 3: Repricing Central Bank Policy
In the final phase, markets begin to adjust expectations for central bank policy.
Investors try to predict:
Will the Bank of Canada still cut interest rates?
Will inflation remain elevated?
Could the conflict last longer than expected?
Bond yields adjust based on those expectations.
Because fixed mortgage rates are influenced by bond yields, these market shifts can directly impact mortgage pricing.
What This Means for Real Estate
For real estate and mortgages, the key variable to watch right now is oil.
If oil prices remain elevated:
Inflation could stay stubbornly high
Rate cuts could be delayed
Fixed mortgage rates may remain elevated
But if oil stabilizes and economic slowdown becomes the dominant force:
Bond yields could decline
Fixed mortgage rates may begin to move lower
There are also several domestic factors putting pressure on the Canadian economy right now:
A weakening economy
A softening labour market
Slowing population growth
Because of this, the bigger risk currently appears to be slower rate cuts—not a return to rate hikes.
Markets currently show a very high probability that the Bank of Canada holds rates steady over the next few meetings.
Why Global Events Matter for Your Mortgage Strategy
Mortgage rates don’t just move based on local housing trends. They’re heavily influenced by global economic conditions, inflation expectations, and bond markets.
Understanding how these forces interact can help homeowners and buyers make smarter timing decisions when it comes to:
Mortgage renewals
Refinancing
Purchasing a property
Even small changes in mortgage rates can translate into thousands of dollars in long-term interest costs.
Final Thoughts
Geopolitical events create complex ripple effects across financial markets. While uncertainty can cause short-term volatility in bond yields and mortgage rates, the long-term direction often depends on how inflation and economic growth evolve.
For now, the biggest story in Canada’s mortgage market is likely how quickly—or slowly—rate cuts arrive.
And as global events unfold, those expectations can change quickly.
Know someone renewing their mortgage this year?
Sharing insights like this can help them understand how global events influence mortgage rates—and potentially save them thousands when timing their next move.
