The Bank of Canada's October 2026 rate hike: What it means for mortgages and housing

Key takeaways:

• On October 28, the Bank of Canada raised its overnight lending rate from 2.25% to 2.50%. It was the first rate increase in over three years.
• Variable mortgage rates will soon rise to reflect the change. The lowest variable rates in Canada will increase from 3.45% to 3.70%.
• The impact to the housing market will be negative, but possibly modest.

On October 28, 2026, the Bank of Canada raised its overnight lending rate from 2.25% to 2.50%. It was the first time in a year that the Bank adjusted the overnight rate, and its first rate hike since July 2023. 

A rate increase was widely anticipated, but not a slam dunk. Rising inflation due to the Iran war’s effect on oil prices pointed toward a hike, while perceived weakness in the Canadian economy may have justified a rate hold. 

But the Bank made a convincing case that the economy is performing better than Canadians might realize. In remarks accompanying the announcement, BoC Governor Tiff Macklem cited economic growth, consumer spending and business investment as indicators that showed positive movement in the second and third quarters of 2026. 

"Despite ongoing weakness in sectors affected by US tariffs, exports overall have strengthened, owing to robust US demand, higher energy production and increasing signs that businesses are adapting to the changing trade environment," Macklem said.

But Macklem also cautioned that the Bank expects inflation to reach 3.5% by year end. If September's inflation reading of 3.1% contributed to the latest rate hike, future increases are likely if inflation meets or exceeds the Bank's expectations. 

What the Bank's October rate hike means for mortgage rates

 Variable mortgage rates

Lenders absorb changes to the overnight rate by raising or lowering prime rate. In this case, prime will increase by 25 basis points. Variable mortgage rates, which are based on prime, will increase as well.

Prior to the Bank's announcement, the lowest variable mortgage rate in Canada was 3.45%. It will soon be 3.70%. 

A buyer who put a 10% down payment on a $666,538* home and amortized over 25 years would have a monthly mortgage payment of $3,072 at a 3.45% rate. A rate of 3.70% ups the monthly payment to $3,154.

The homeowner will pay $82 more per month, or $984 per year, on their mortgage.

*September 2026 average home price in Toronto (CREA)

Fixed mortgage rates

Bank of Canada rate decisions don't directly impact fixed mortgage rates, so a rate hike has no effect on current fixed rates. Today's lowest 5-year fixed mortgage rate is 4.34%, and will remain that way until lenders decide to raise or lower their offers.

To make those decisions, lenders look to Government of Canada bond yields. 

Yields have been extremely volatile this month, as investors reacted to persistently high oil prices and the likelihood of the Bank's latest rate hike. Five-year yields, which lenders use to price their five-year fixed rates, are within 12 basis points of their Iran war-era high.

That doesn’t bode well for significant fixed-rate decreases in the near future. For fixed rates to dip back to around 4%, yields may need to fall by another 15 to 20 basis points. They might need some help, like an end to the war, for that to happen. 

The fixed vs. variable debate 

In a rising rate environment, the decision to go fixed or variable becomes even more challenging. Borrowers don't want to make the wrong decision.

But assuming there's a cut-and-dried "right" decision isn't fair. Both fixed and variable rates can be beneficial in the current climate. Variable rates provide immediate savings and flexibility; fixed rates offer stability. 

Both rate types also carry risks that borrowers need to consider.

Based on the BoC's inflation expectations, variable rates may increase multiple times between now and the second quarter of 2027. That could stretch a variable-rate mortgage holder's finances.

Fixed-rate mortgages can't be broken or altered without incurring steep pre-payment penalties. If non-mortgage costs increase and paying off a fixed-rate loan becomes problematic, borrowers have little room to maneuver. 

Making the "right" fixed-versus-variable call means choosing the right mortgage type for your unique financial situation. Whatever rate type that may be, consider getting pre-approved for a mortgage and locking in a rate to protect you from further rate increases between now and the day you sign your mortgage contract.

How will the BoC's October rate hike impact the Canadian housing market?

Higher variable mortgage rates are likely to have a modestly negative affect on home sales and prices this fall. Higher borrowing costs are rarely met with enthusiasm from home buyers.

The impact to mortgage affordability will be minor in many scenarios. On a $500,000 home purchase with a 10% down payment and a 25-year amortization, the difference in monthly payment between a 5-year variable rate at 3.45% and one at 3.70% is only $62.

That won't be a dealbreaker for most buyers. Variables are still low by historical standards. But if the thought of multiple variable rate hikes makes buyers cautious, and they're unable to qualify for a costlier fixed rate, the path to homeownership is essentially blocked.

In addition to affordability challenges, buyers also have to contend with high everyday costs and the uncertainty caused by the Iran war and the economic battle between the U.S. and Canada. Once some of these knots untangle, housing demand will recover. 

When that happens is impossible to say. But it probably won't be before the BoC's next rate decision in December.