Trade Tensions Loom Large: Could U.S. Tariffs Drive Mortgage Rates Higher?

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Rising Trade Tensions and Mortgage Rate Outlook

As new U.S. tariffs loom over Canadian exports — including a sweeping 25% tariff under the 2025 trade war directive — economists and real estate analysts are warning that these trade measures could push Canadian mortgage rates higher in the near term

In a Reuters poll of 16 analysts, Canada’s housing market is expected to see a 2% drop in home prices in 2025, largely driven by weakened buyer sentiment amid trade uncertainty and ongoing tariff pressure . While the Bank of Canada (BoC) has responded with 225 basis points of rate cuts since mid-2024, traders and homeowners alike are wondering whether future mortgage costs will be harder to slide further downward.

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Tariffs Impact Mortgage Rates via Construction & Bonds

Tariffs on Canadian lumber, steel, and aluminum can raise costs not only for construction but potentially mortgage rates too. A significant analysis by the National Association of Home Builders in the U.S. suggests that tariffs on building materials add roughly US $10,900 to the cost of a typical new home, a factor that could ripple into bond markets and borrowing costs

Such cost increases erode housing supply while maintaining demand, which in turn propels builders to pass costs onto buyers. Rising home prices often trigger inflation concerns—causing investors to push bond yields higher and, consequently, mortgage rates rise alongside long-term interest rates.

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Bank of Canada Tightrope: Rate Cuts vs. Inflation Risks

Though underlying inflation dropped to 1.7%, core measures (CPI‑trim and CPI‑median) remain near 3%, the upper edge of the BoC’s target

The central bank is walking a fine line — ready to pause rate cuts until they’re certain core inflation trends are stable and trade fallout is contained. BoC governor Tiff Macklem has flagged tariffs as a major risk to economic stability, warning they could sustain inflation and stress households already carrying high debt

This cautious stance decreases the likelihood of upcoming rate reductions, keeping mortgage rates elevated relative to expectations earlier this year.

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Bond Markets & Mortgage Rate Signals

U.S. and Canadian 10-year government bond yields have reacted sharply to tariff news and macro data, reflecting heightened inflation and credit concerns. A sell-off in bond markets—prompted by trade fears—has pushed yields to 4.5% on U.S. Treasuries .

Mortgage rates, which closely track these benchmark yields, are feeling the squeeze. Higher long-term yields tend to ripple into 5-year fixed mortgage contracts, which make up a significant share of Canadian home loans. As bonds offer fixed rate returns to investors, lenders must offer comparable yields—effectively passing bond market pressures onto mortgage borrowers.

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Falling Home Prices, But Mortgage Burden Remains

Canada’s average home prices are projected to fall about 2% in 2025, yet affordability remains strained. Home prices still hover near 10× average household incomes, and ~$2 trillion in outstanding mortgage debt amplifies household vulnerability .

Even as house prices soften, rising mortgage rates could offset some savings—deterring new buyers and forcing existing homeowners to reassess renewals and refinancing decisions.

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What Borrowers Should Watch Now

• 🔸 Future BoC decisions: Watch for rate cuts beyond July — shrinking odds may reduce your chance to lock in low rates
• 🔸 Bond market trends: If Canadian 10-year yields continue to rise, long-term fixed mortgage rates may follow
• 🔸 Trade policy developments: News of tariff escalations or negotiations will likely shift bond yields and mortgage pricing

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Long-Term View: Resilience, but Clouds Ahead

Canada’s financial system is resilient, with lower recent interest rates helping to ease household burdens

However, if tariff escalation continues — especially on steel, lumber, and aluminum — the BoC may be forced to delay or reverse rate cuts. In worst-case projections, prolonged trade disputes could reignite inflation, stall economic growth, and bump mortgage costs higher.

For now, modest housing softness may help balance pressures—but mortgage holders should remain vigilant and flexible in their refinancing or renewal plans.

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🔍 Summary Table

Factor	Impact on Mortgage Rates
U.S. Tariffs on Imports	⬆ Pressure via inflation
Bond Yield Volatility	⬆ Long-term mortgage rates
BoC Rate Policy Stance	⬇ Slower rate reductions
Home Price Declines (–2%)	⬇ Affordability improves
Household Debt ($2T)	⬆ Sensitivity to rate moves

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Conclusion

U.S. trade tensions carry meaningful knock‑on effects for Canada’s housing and mortgage markets. Even as home prices cool slightly, rising construction costs, bond yields, and central bank caution may pressure mortgage rates upward. Borrowers should act with foresight, keeping tabs on trade developments, bond movements, and the BoC’s communications before making financial decisions.