How a War in the Middle East Can Actually Affect Your Mortgage Payment

I know that sounds like a stretch. A war happening thousands of kilometres away affecting your monthly mortgage payment here in South Surrey? But it is real, it is happening right now, and I want to break it down in plain language because I think every homeowner and buyer in Canada should understand this.

Bear with me. I promise it makes sense by the end.

It All Starts With Oil

When conflict breaks out in the Middle East, one of the first things that happens is oil prices spike. The Middle East produces a massive portion of the world's oil supply and any threat to that supply makes markets nervous. Nervous markets buy oil faster, and when demand jumps and supply feels uncertain, the price goes up.

On February 26th, a barrel of oil was sitting at $67. As of this morning it is just over $100 a barrel. That is nearly a 50% increase in 10 days.

You might be thinking, okay oil is expensive, that affects gas prices. And you are right, but that is just the beginning.

Oil Prices and Inflation Are Connected

Think about how almost everything you buy gets to you. It is driven, flown, or shipped. Fuel is an input cost in basically every product that exists. When fuel gets more expensive, the cost of making things and moving things goes up. Businesses pass that cost on to consumers. Prices rise across the board.

That is inflation.

Canada had actually been doing pretty well on inflation lately. It was sitting comfortably within the Bank of Canada's target range of 1% to 3%. Part of the reason for that was energy prices had been coming down and the Carbon Tax was removed, both of which helped keep everyday costs in check. That progress is now being threatened.

The Bond Market Is the Real Price Setter for Fixed Mortgages

When the Canadian government needs to borrow money it issues bonds. Investors buy those bonds in exchange for a guaranteed return over a set period of time. The Canada 5 Year Bond is the most watched one in the mortgage world because lenders use it as their benchmark for pricing 5 year fixed mortgage rates.

Here is the key thing to understand. Bond investors hate inflation. If you lend someone money for 5 years and inflation runs hot during that time, the money you get back at the end is worth less than the money you lent out. To protect themselves, bond investors demand a higher return when they think inflation is coming. When they demand higher returns, bond yields rise.

When bond yields rise, lenders have to pay more to access the money they use to fund your mortgage. So they charge you more. That is the direct link between a war in the Middle East, rising oil prices, inflation fears, bond yields, and the fixed rate your lender quotes you on a Tuesday morning.

On February 26th the Canada 5 Year Bond Yield was 2.67%. As of this morning it is at 3.012%. That is a jump of about 33 basis points in 10 days. In the mortgage world that is a meaningful and fast move, and it has already started filtering into the fixed rates lenders are offering.

So What Does This Mean for the Bank of Canada?

The Bank of Canada's entire job is to keep inflation under control. Their main tool for doing that is interest rates. When inflation rises, the Bank of Canada raises rates to slow down spending and cool the economy down. When rates go up, the cost of borrowing goes up. And when the cost of borrowing goes up, mortgage rates go up.

The bond market moves first and moves fast, which is why fixed rates are already feeling the pressure. The Bank of Canada moves more deliberately, but if oil stays high and inflation starts climbing, their next decision gets a lot more complicated. They announce on March 18th and this will absolutely be on their radar.

What This Means If You Have a Mortgage Right Now

If you have a fixed rate mortgage you are locked in and protected from these short term swings until your renewal date. But if your renewal is coming up in the next 6 to 12 months you need to be paying attention because the rate you renew at could be noticeably higher than it would have been just a few weeks ago.

If you have a variable rate mortgage your payments are tied to the Bank of Canada's policy rate. If inflation keeps rising and the Bank of Canada responds by pausing rate cuts or even raising rates, your variable payments could increase.

If you are a buyer trying to get pre-approved right now, the fixed rates lenders are quoting today are higher than they were two weeks ago. That affects how much home you qualify for.

What Should You Actually Do?

The honest answer is that nobody knows exactly how this plays out. Wars are unpredictable, oil markets are volatile, and the Bank of Canada will make their next call on March 18th. What I do know is that waiting and hoping is not a strategy.

If you have a renewal coming up, let us look at your options now before rates move further. Locking in early or exploring different terms could save you real money.

If you are buying, getting pre-approved sooner rather than later locks in today's rate for 90 to 120 days, which protects you if things continue moving upward.

If you are in a variable rate, it is worth having a quick conversation about whether staying variable still makes sense for your situation or whether switching to fixed gives you better peace of mind.

I will be watching the Bank of Canada announcement on March 18th closely. I

Tyler Waldron Real Estate and Mortgages