Posted On Mar 14, 2026

Over the past few weeks, a word that many Canadians have not heard in decades has started to appear again in economic discussions:

Stagflation.

It’s not a pleasant term - and understandably it can cause anxiety for homeowners, buyers, and anyone facing a mortgage renewal in the near future.

With millions of Canadian mortgages renewing over the next two years, understanding what stagflation means - and how it could affect interest rates - has become increasingly important.

Let’s break it down in simple terms.

 

Why Mortgage Rates Are Moving in Canada

Many homeowners assume mortgage rates move directly with the Bank of Canada’s interest rate. In reality, fixed mortgage rates in Canada are primarily influenced by Government of Canada bond yields - especially the 5-year bond yield. When bond yields rise, lenders’ funding costs increase and fixed mortgage rates often rise as well. When bond yields fall, fixed mortgage rates typically follow.

What Is Stagflation?

Stagflation is an economic environment where three difficult conditions happen at the same time:

• Economic growth slows

• Inflation remains elevated

• Interest rates stay higher than expected

Normally, when the economy slows, inflation falls and central banks cut interest rates.

But during stagflation, inflation increases (or at least does not fall fast enough), which prevents central banks from easing policy as quickly as markets might hope.

That creates a challenging environment for borrowers.

Why Economists Are Talking About It Again

Several global factors are raising concerns that stagflation risks could increase in the coming years.

1. Persistent Inflation

Even though inflation has fallen from the highs of 2022, it remains stubbornly above central bank targets in many countries.

In Canada, the Bank of Canada still wants inflation sustainably near 2%, but certain components - especially shelter and services - remain sticky.

2. Slowing Economic Growth

At the same time, economic momentum has weakened.

Consumers are adjusting to higher borrowing costs, housing activity has cooled compared to pandemic highs, and businesses are becoming more cautious about investment.

3. Global Instability

Ongoing geopolitical tensions, supply chain disruptions, and energy price volatility continue to create inflationary pressure globally.

These types of shocks were major contributors to the original stagflation period of the 1970s.

Why Bond Yields Matter for Mortgage Rates

One important piece of the interest rate puzzle that many homeowners don’t hear about often is bond yields.

In Canada, fixed mortgage rates are largely influenced by Government of Canada bond yields, particularly the 5-year bond yield.

When lenders offer fixed-rate mortgages, they often hedge their lending by investing in government bonds with similar terms. Because of this, mortgage rates tend to move in the same direction as bond yields.

When bond yields rise → fixed mortgage rates usually rise
When bond yields fall → fixed mortgage rates usually fall

What Is Happening With Bond Yields Right Now?

Recently, bond yields have been moving higher again, and there are several reasons for that:

• Investors remain concerned that inflation could stay stubborn

• Governments around the world are issuing large amounts of debt

• Global uncertainty is increasing demand for higher yields

If investors believe inflation will remain elevated for longer, they demand higher returns to lend money, which pushes bond yields upward.

And when yields rise, lenders often increase fixed mortgage rates.

Why This Matters for Fixed Mortgage Rates in Canada

Because fixed mortgage rates are closely linked to bond yields, they can sometimes move independently of the Bank of Canada’s policy rate.

This is why homeowners occasionally see fixed mortgage rates rise even when the Bank of Canada has not increased rates.

In the current environment, concerns about inflation and global economic uncertainty are putting upward pressure on bond yields, which can limit how quickly fixed mortgage rates decline.

For homeowners approaching renewal, this means the path of mortgage rates may be less predictable than many people hope.

Why This Matters for Canadian Mortgage Holders

For homeowners with mortgages, stagflation presents a specific challenge.

If inflation remains stubborn:

• The Bank of Canada cannot cut rates aggressively

If the economy weakens:

• Household incomes and job security can become less certain.

This creates a difficult balancing act for borrowers - especially those approaching mortgage renewal.

The Mortgage Renewal Wave Is Coming

One of the most important housing stories in Canada right now is the renewal cycle.

Between 2025 and 2027, a large number of mortgages that were originated during ultra-low pandemic rates will mature.

Many of these borrowers originally locked in rates between 1.5% and 2.5%.

Even if interest rates decline somewhat, renewal rates will likely still be meaningfully higher than what many homeowners are used to.

For some households, that could mean payment increases of hundreds of dollars per month.

 

What Homeowners Should Be Thinking About Now

While no one can predict the exact path of interest rates, homeowners can take several practical steps to prepare.

1. Start Planning Early

If your mortgage renews within the next 12–18 months, it’s worth reviewing your options well in advance.

Understanding what your payment might look like at different rate levels can help avoid surprises.

2. Review Your Amortization Strategy

In some situations, extending amortization during renewal can help manage payment increases.

While this increases total interest paid over time, it can provide valuable cash flow flexibility during uncertain economic periods.

3. Consider Term Strategy Carefully

Different mortgage terms perform better under different economic scenarios.

For example:

• Shorter terms can provide flexibility if rates decline

• Longer terms provide payment stability if inflation proves stubborn

The right strategy depends heavily on your personal situation and risk tolerance.

4. Focus on Cash Flow

In a stagflation environment, maintaining financial flexibility becomes especially important.

Households that manage their cash flow effectively tend to navigate uncertain periods much more comfortably.

The Good News

While the word stagflation can sound alarming, it’s important to remember that today’s economic environment is not identical to the 1970s.

Central banks are more proactive, financial systems are stronger, and policymakers are closely monitoring risks.

For homeowners, the key is not panic - but preparation.

Final Thoughts

The next few years may bring a more complex economic landscape than the ultra-low-rate era many Canadians became accustomed to.

Bond yields, inflation trends, and global economic conditions will all play a role in shaping where mortgage rates go from here.

For homeowners approaching renewal, the most important step is simply having a plan.

Let’s Connect

If you’d like to review your mortgage strategy, explore renewal options, or understand how different interest-rate scenarios might affect your payments, I’d be happy to help.

Call/text: 416-801-6616
Email: Domenic@BetterMortgagesByDom.ca

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Dom