How higher interest rates can impact mortgages and spending in Canada

A higher interest rate environment could impact Canadians' discretionary spending plans as a larger share of household income would be required for mortgage payments, and could also affect buyer sentiment in the housing market.

What are consensus expectations for upcoming Bank of Canada policy decision?

After a full year of holding interest rates steady, speculation is growing that the Bank of Canada (BoC) could start raising borrowing costs as early as its next announcement on Oct. 28. The BoC has held its benchmark interest rate at 2.25% since October 2025 as the country navigated uncertainty around the war in Iran and U.S. President Donald Trump’s global trade disputes.

But renewed inflation concerns are prompting some economists to rethink how long the Bank can stay on the sidelines, especially since the U.S. Federal Reserve (Fed) raised borrowing rates by 25 basis points on September 16.

Dominique Lapointe, senior director of macro strategy for Manulife Investment Management, said in an analyst note that the BoC will likely raise interest rates at its next two meetings, as the prolonged conflict in Iran is likely to put pressure on core goods prices.

Here are short-term expectations from major financial institutions in Canada on the Bank's policy plans to the end of 2026.

Source: Financial institutions' latest forecasts as of Oct. 7, 2026.

How do rate hikes affect consumer spending?

In terms of consumer spending, an increase of 25 bps is relatively small, so its impact would likely be moderate, says Victor Couture, associate professor and the Camrost Felcorp Chair in Real Estate at the Rotman School of Management.

But the ratio of Canadians' debt to disposable income was slightly over 177 at the end of Q2, 2026, according to Government of Canada data. Households that are stretched to their limits could have to make some adjustments. For example, if a family is paying more on their mortgage, they may have to start cutting equivalent costs on other areas of consumption.

Typically, consumers start eliminating discretionary expenses, such as holidays or trips to amusement parks, while prioritizing their mortgage and groceries, Couture says. 

Retail analyst Bruce Winder adds that an October rate increase could “put a small damper” on fall spending, particularly on more expensive items that require financing. 

Variable-rate debt, including lines of credit, becomes more expensive following a rate hike. 

However, for savers, rate hikes can offer a small win because high-yield accounts are tied to short-term rates.

How will a BoC rate hike impact my mortgage?

For mortgage holders, impacts of a rate hike depend on what type of mortgage you’ve locked into.

When the BoC raises its policy rate, banks typically adjust their prime rates, which are used to then price variable-rate mortgages, said Tom Storey, a sales representative at Royal LePage.

For borrowers with fixed payment variable-rate mortgages, the amount coming out of their bank account may not immediately change. Instead, a high percentage of monthly payments would go towards interest compared to a borrower's principal loan amount.

Borrowers with adjustable-rate mortgages, on the other hand, would see a more immediate impact because their mortgage payments adjust as rates change.

Storey estimates that an increase of 25 bps would add roughly $14 a month for every $100,000 borrowed for someone whose variable-mortgage payment adjusts. For most borrowers, the financial impact of that is likely small. 

He notes that one common misconception is that fixed-rate mortgages will also be impacted immediately. That’s just not true, Storey says. “If you have a fixed rate, your payment's not changing for the rest of your term.”

Instead, it’s the Government of Canada 5-year bond yield that affects fixed rates, and those rates have already gone up. Buyers looking to lock in a fixed rate can expect new fixed-mortgage rates to gradually move higher reflecting market expectations for sustained policy tightening.

How will higher interest rates impact Canada's housing market?

A rate hike has more than financial implications. It can also impact buyer sentiment. 

“One of the biggest things for the housing market is certainty on mortgage rates, jobs, the economy, and people don’t like to make big life decisions if they’re not sure what’s going to happen next,” Storey says.

When rate hikes and fears around inflation make news headlines, it leads prospective homebuyers to question whether it’s the right time to enter the market, he adds. Likewise, sellers start to ponder whether it’s the right time to sell. 

Historically, rate hikes have led to a cooling of the housing market. For example, rate increases that began in 2022 were one factor leading to falling housing prices. 

But Couture argues this doesn’t solve the affordability problem. Buyers may need a smaller down payment as home prices fall, but higher borrowing costs can increase their mortgage payments.

Higher rates also affect housing construction costs, he added. 

Developers are already struggling in major markets, such as the Greater Toronto Area, he said, so higher borrowing costs “are not going to help". And, over time, it could result in fewer new housing projects moving forward.