Why the Bank of Canada Has No Choice But to Raise Rates in October 2026
Update, October 28, 2026: the Bank of Canada raised its policy rate by 0.25%. Read what to do now that rates are up.
Key Takeaways
- Rate Hike Imminent: Financial markets are pricing in an over 80% probability of a 0.25% rate hike from the Bank of Canada on October 28, 2026.
- Inflation Expectations are the Cause: The primary driver isn't the headline inflation number, but a recent Bank of Canada survey showing Canadians' long-term inflation expectations have jumped to 3.9%, the highest level since 2022.
- The Cost to You: For every $100,000 of your mortgage balance, a 0.25% rate increase will cost you roughly $13.50 more per month. On a $500,000 mortgage, that's about $67.
- To Lock or Not to Lock: The decision to lock in your variable rate depends on your personal risk tolerance. If you can't comfortably afford payments increasing by a few hundred dollars over the next year, it might be time to consider a fixed rate.
What Changed? Why a Rate Hike Is Suddenly So Likely
The single number that shifted the odds of a rate hike from 25% to over 80% in just two weeks wasn't the job report or even headline inflation. It was a survey. The Bank of Canada's latest Canadian Survey of Consumer Expectations for Q3 2026 showed that people believe inflation will average 3.9% over the next five years, a significant jump from 3.4% in the previous quarter. This is the one thing the Bank worries about most. Once people expect prices to keep rising, businesses start raising their own prices in anticipation, and workers push for bigger raises to keep up. This creates a cycle that makes inflation much harder to control. The Bank would rather raise rates now to cool those expectations than fight a much bigger problem later.
This is why the market is ignoring other, weaker economic signals. On October 9th, we learned that Canada lost 68,300 jobs in September, pushing the unemployment rate up to 6.5%, as reported by CityNews in 2026. Normally, that would be a clear sign for the Bank to hold steady. Even the official inflation numbers from September were mixed. While the headline rate rose to 3.1%, driven by a 27.8% year-over-year spike in gas prices, the Bank's preferred core measures actually fell to 1.9% and 1.8%. Since the Bank's target is 2%, those core numbers suggested they had room to wait. But the power of public expectation has forced their hand. The market, where banks and investors bet real money on rate decisions, has decided a hike is coming.
Should I Lock In My Variable-Rate Mortgage Before the Announcement?
You should only lock in your variable-rate mortgage if three specific conditions are met: you cannot comfortably absorb a payment increase of a few hundred dollars per month, you are certain you will not need to move or refinance in the next few years, and your current variable-rate discount is small. The market is currently pricing in four separate 0.25% increases over the next 12 months. On a $500,000 mortgage, that's a potential payment increase of about $276 per month. If that number makes you lose sleep, locking in provides peace of mind. However, if it wouldn't drastically change your lifestyle, staying variable may still be the better long-term play, especially if economists who think the market has overreacted are correct.
Before you rush to call your bank, remember that fixed rates have already moved up. Fixed mortgage rates follow government bond yields, not the Bank of Canada's overnight rate, and those yields have risen over the last few months. The fixed rate you're offered today is already more than half a percent higher than it was in July. The key factor is the 'spread' between your variable rate and the fixed rate you're being offered. If your variable rate is still 1% lower than the fixed option, it would take four full rate hikes just to break even. I typically look for a spread of at least 0.75% to even consider a variable rate today. If your spread is less than 0.50%, the head start is minimal, and locking in becomes a much safer bet.
What's the Difference Between an ARM and a VRM?
An Adjustable-Rate Mortgage (ARM) has a payment that changes immediately with the prime rate, while a static Variable-Rate Mortgage (VRM) has a fixed payment where more of your money goes to interest after a rate hike. It's critical to know which one you have. If you have an ARM, a 0.25% rate hike means your payment will go up within days. On a $500,000 mortgage, that's an extra $67 coming out of your bank account each month. If you have a VRM, your monthly payment won't change, which feels less painful upfront. However, the composition of that payment shifts. Less money goes toward paying down your principal balance, and more goes to interest. This means your mortgage balance will be higher at the end of your term than you originally planned. The main risk with a VRM is hitting your 'trigger rate'. This happens when your fixed payment is no longer enough to cover even the interest portion of your loan. At that point, your lender can force you to increase your payments, make a lump-sum payment, or convert to a fixed rate. Pull up your mortgage statement this week to confirm your payment type so you're not surprised.
What Questions Should I Ask My Bank Before Locking In?
Before you agree to lock in your mortgage, you must ask your lender three specific questions and get the answers in writing. First: 'What exact rate and term are you offering me?' Second: 'What is the best rate available on the open market for a comparable term?' And third: 'What would my penalty be to break this new fixed-rate mortgage in two years?' Do not accept verbal answers or pressure tactics. Some banks are aggressively calling clients, creating a false sense of urgency. Get the offer in writing so you can compare it properly. The penalty question is especially important. Variable-rate mortgages have a predictable penalty of just three months' interest. Fixed-rate mortgage penalties can be far more complex and expensive, often calculated using an Interest Rate Differential (IRD) that could cost you tens of thousands of dollars if you need to sell your home unexpectedly. If the bank representative can't or won't answer these questions clearly on the call, don't sign anything. It's your money, and you deserve a clear, transparent offer you can evaluate without pressure.
Frequently Asked Questions
How much will my mortgage payment go up if the Bank of Canada raises rates?
A 0.25% increase in the prime rate will raise your monthly payment by approximately $13.50 for every $100,000 of your mortgage balance. For a $500,000 mortgage, this works out to about $67 per month. For an $800,000 mortgage, the increase would be around $108 per month. This only applies if you have an adjustable-rate mortgage (ARM) where the payment moves with prime. If you have a fixed-payment variable mortgage (VRM), your payment amount will not change, but more of it will go towards interest.
What is a 'trigger rate' on a variable mortgage?
A trigger rate applies to variable-rate mortgages with fixed payments (VRMs). It's the interest rate point at which your fixed monthly payment is no longer sufficient to cover the interest owed for that month. When this happens, your loan begins to negatively amortize, meaning your total mortgage balance starts to increase instead of decrease. Lenders will not allow this to continue and will contact you to either increase your monthly payment, make a lump-sum payment, or convert to a fixed-rate mortgage.
Are fixed mortgage rates also going up?
Yes, fixed mortgage rates have already been rising for several months. Fixed rates are priced based on the Government of Canada bond market, particularly the 5-year bond yield, not the Bank of Canada's overnight rate. As investor expectations for future inflation and economic growth have changed, bond yields have increased, causing lenders to raise their fixed mortgage rates. Someone getting a fixed rate today is paying over 0.50% more than they would have in July 2026.
What are the odds of a rate hike on October 28, 2026?
As of October 26, 2026, financial markets that trade on interest rate futures are pricing in an over 83% probability of a 0.25% rate hike by the Bank of Canada on October 28th. While this isn't a guarantee, odds this high so close to an announcement date are historically very accurate. The market sentiment shifted dramatically after a Bank of Canada survey revealed consumers' long-term inflation expectations had risen sharply, which is a key concern for the central bank.
When is the next Bank of Canada rate announcement?
The next Bank of Canada interest rate announcement is scheduled for Wednesday, October 28, 2026, at 9:45 AM Eastern Time (6:45 AM Pacific). This is one of the four meetings per year where the Bank also releases its full Monetary Policy Report, which includes detailed forecasts for the Canadian and global economies. After this meeting, the final scheduled announcement for 2026 is in early December.
If you're trying to figure out what this means for your own mortgage, the best first step is to get the numbers from your lender. Find out your exact rate, your mortgage balance, and what fixed rate they can offer you. Once you have that, use our rate check tool at rate.getflowmortgage.ca or send me an email at alex@getflowmortgage.ca. We can run the numbers and give you a clear second opinion. You can also call us directly at 250-869-5334.
By Alex McFadyen, Mortgage Broker & CEO, Flow Mortgage Co.
What to do next
Run your own numbers in our renewal calculator, or read the mortgage penalty calculator for the full picture. If you want a second set of eyes, book a free call and we'll go through it with you.