“When a butterfly flutters its wings in one part of the world, it can eventually cause a
hurricane in another.” – Edward Norton Lorenz
You might know that the mortgage market in Canada can be affected by conflicts happening halfway around the world… but do you know how?
Here’s a quick 10,000-foot view (at the risk of being over simplified) using the recent USA/Iran conflict, and what to expect (from a mortgage perspective)!
December 2025 /January 2026 – Iran’s currency fails, tensions explode over inflation and leadership, and protests occur across the country. Iran’s paramilitary Revolutionary Guard declared a terrorist organization by the European Union for their deadliest response to a protest (involving mass killings), that the country has ever seen since 1979.
February 2026 – The Revolutionary Guard also defies international orders to cease making progress towards nuclear weapons.
Which led to…Israel, using American intelligence, coordinates the first airstrike to eliminate Ali Khamenei – supreme leader of Iran.
Which led to… Iran retaliation. The Revolutionary Guard releases hundreds of explosive drones and missiles into neighboring countries aligned with the USA/Israel. More importantly (for the point of this article), they also block the Strait of Hormuz – blocking a naval passage that’s responsible for just under 20% of the world’s oil supply.
Which leads to… rising oil prices. Basic economics demonstrates that when supply goes down, and demand doesn’t decline by the same ratio, prices go up. As of this writing, the Crude Oil WTI is already up 10.38% since the Hormuz blockade.
Which leads to… inflationary pressures. At its simplest level, every product you buy needs to be transported. So, if the cost of oil/gas rises, so too does the cost to produce and ship everything.
Which leads to… a potential future Bank of Canada rate hike. The Bank of Canada is unlikely to make any changes (based on this), just yet. They’ll need to see how permanent some of these oil price effects will be, especially since the current battles are expected to last at least 2 months (based on present estimates).
Which leads to… the bond market yields rising. Bond yields need to price in potential future rate hikes in their present value calculations. 5 Year Canadian Government Bonds are up 0.13% (13 basis points) since Friday.
Which leads to… fixed rates rising. There’s always a delay between when bond rates rise and when the fixed rates consumers see rise, BUT given that some lenders have written loans below their profitability line (that’s a topic for a future writing) it’s possible we could see the response time in lenders upping their rates be quicker. Or not… Lenders may hold off for a bit just to see how the markets settle before making any adjustments to fixed mortgage rate pricing. If the current markets hold, it would be reasonable to expect an increase in fixed mortgage rates by maybe 10 to 15 basis points (that’s 0.1% to 0.15%).