Why rising government debt could push long-term rates higher — and what that means for your mortgage

The big picture: debt is high, and markets are reacting

Governments around the world borrowed heavily during the pandemic and in the years since to support economies through inflation, wars, and climate shocks. Today, public debt in advanced economies is roughly 110% of GDP—a level last seen in the early 1800s, according to the IMF.

This has consequences. Investors who buy government bonds—essentially, the world’s lenders—are beginning to demand higher long-term yields as compensation for fiscal risk. As The Economist recently put it, “Debts have reached vertiginous highs and bond markets are showing resistance.” Put simply, markets want to be paid more to lend for longer.

Why long-term rates may stay higher

• Governments are paying more interest. Much of the debt issued when rates were near zero is coming due. Refinancing at today’s levels means governments are paying much more to borrow.

• Spending pressures are structural. Ageing populations, defence budgets, and climate adaptation all keep deficits wide.

• Inflation risk lingers. Even moderate inflation helps governments reduce debt in real terms—so investors build an inflation premium into long-term yields.

These forces make it unlikely that long-term rates—like those tied to 5-, 10-, or 30-year bonds—will return to the ultra-low levels of the 2010s anytime soon.

What this means for Canadian mortgages

Fixed mortgage rates in Canada move closely with the Government of Canada (GoC) bond yields, especially the 5-year. When GoC yields rise or fall, lenders adjust mortgage rates accordingly. Bank of Canada explainer →

As of late October 2025, the 5-year GoC yield hovered near 2.6–2.7%, down from recent highs but still influenced by global trends in debt and inflation.

Two forces shaping the outlook

1. Short term (next 12–18 months): Canada’s economy has cooled. That tends to keep yields in check and may create occasional dips in fixed mortgage rates—as we’ve already seen in recent months.

2. Longer term (beyond 18 months): Global debt pressures are likely to keep long-term borrowing costs elevated. Even if central banks lower short-term policy rates, investors may continue demanding a higher premium on longer bonds, pushing up long-term mortgage rates over time.

In other words: the short-term outlook is constructive for borrowers, but the structural backdrop suggests a higher floor for rates than we’ve grown used to.

What experts are saying

Economists and bond analysts note that:

• “Ten-year government bonds yield more today than when central banks began cutting rates again in 2024.” → Translation: Long-term rates can rise even as short-term ones fall.

• “About half of OECD fixed-rate debt was issued below 2%; rolling that debt now adds roughly two percentage points in interest.” → Translation: As governments refinance at higher rates, it adds upward pressure on long-term yields.

• “The risk that politicians lean on central banks to tolerate inflation increases.” → Translation: Even if inflation remains ‘under control,’ markets keep a cushion for that risk—another reason yields stay firm.

What this likely means for homeowners and buyers

1. The next 12–18 months may bring opportunity.

With growth slowing and inflation easing, bond yields could dip, creating windows for more competitive fixed-rate offers than last year’s highs. For buyers or homeowners renewing soon, this could be a moment to act.

2. Over the longer term, higher rates may be the “new normal.”

Structural spending and refinancing needs worldwide make it unlikely that long-term rates will fall back to pre-pandemic levels. Expect higher average fixed rates than those seen in the 2010s.

3. Fixed vs. variable: balancing risk and certainty.

When long-term rates are more likely to rise than fall, locking in a fixed term can serve as valuable protection, especially for households with tighter budgets or plans to stay in their home for several years.

How to approach your mortgage strategy

• Renewing soon (next 3–12 months): Monitor 5-year GoC yields. If they dip, consider locking in a short-to-medium fixed term (2–3 years) or a discounted variable rate—with a plan to revisit if rates climb again.

• Buying or renewing in 12–18 months: Get a rate hold early (most lenders allow 90–120 days) to capture temporary dips. Your broker can help secure a better offer if yields move.

• Long-term homeowners (5–10+ years): When the timing feels right, consider longer fixed terms (5–10 years). In a higher-debt world, the cost of certainty may be worth paying for.

• First-time buyers or anyone managing tight cash flow: Focus on payment stability. Your broker can structure your amortization and prepayment options to balance flexibility with security.

• Property investors: Consider staggering renewal dates or mixing term lengths to spread out exposure to future rate changes.

The key takeaways

• Next 12–18 months: Slower Canadian growth could bring short-lived rate relief.

• Beyond that: Global debt and inflation risks may keep long-term mortgage rates higher than the decade before.

• Your advantage: Use this near-term window wisely, and plan ahead for a world where “low for long” may not return.

We’re here to help you navigate these shifts with confidence—whether you’re renewing, buying, or simply planning ahead. Thoughtful timing and structure can make a measurable difference in your long-term financial well-being.