The 2025 Mortgage Renewal Shock: How Rising Rates Will Reshape Canadian Finances and Housing Markets

As we step into 2025, Canadian homeowners are bracing for a wave of mortgage renewals set to reshape household finances across the country. According to the Canada Mortgage and Housing Corporation (CMHC), 1.2 million mortgages are up for renewal this year, with 85% of these originally contracted during a period when the Bank of Canada’s interest rate was at or below 1%. For many, the era of exceptionally low borrowing costs has come to an end, and the financial shift could be substantial.

This financial shift will not only challenge household budgets but could also create ripple effects that impact overall economic stability.

Higher Payments, Higher Concerns

About 30% of homeowners are concerned about keeping up with their monthly payments after renewal. Many will see their interest rates jump from around 2% to over 4%. This change will be especially challenging for those renewing fixed-rate mortgages that were locked in during the low-interest period of the early 2020s. Homeowners in high-cost areas like Toronto and Vancouver will feel the pinch more acutely, given the larger mortgage balances typical of these regions. These mortgage payment increases could trigger a domino effect, potentially destabilizing local economies and creating broader financial challenges across housing, retail, and consumer spending sectors. Despite these challenges, there are practical steps homeowners can take to manage the impact.

Economic Implications of Higher Mortgage Costs

1. Consumer Spending Slowdown

With more income geared toward higher mortgage and debt payments, disposable income will shrink. This reduction is likely to curb consumer spending, which could have far-reaching effects on sectors such as retail, hospitality, and services. Households may prioritize essential spending, leading to slower economic growth.

2. Potential Housing Market Adjustments

Higher borrowing costs may lead to a rise in delinquencies for homeowners, particularly as 1.2 million fixed-rate mortgages—85% of which were signed when interest rates were at or below 1%—come up for renewal in 2025. The national mortgage default rate rose to 0.19% in Q2 2024, up from 0.17% in Q4 2023, and is projected to climb further as households face significantly higher renewal rates despite recent Bank of Canada rate cuts to 3.75% . Rising delinquencies in other credit sectors, such as auto loans (2.42%) and credit cards (1.70%), suggest that mortgage defaults could continue increasing into 2025 .

Higher borrowing costs are increasing risks in the alternative lending sector, which serves higher-risk borrowers and could trigger price adjustments in the housing market. High-priced regions like Toronto and Vancouver may experience a drop in demand, potentially putting downward pressure on home values as affordability worsens. By contrast, more affordable regions such as Alberta and Saskatchewan, where inventories remain tight, are expected to see higher price growth of around 9%, driven by sustained demand .

Homeowners, particularly those who purchased homes during the pandemic at historically low interest rates are among the most impacted as they now face significant increases in mortgage payments. Meanwhile, areas with more affordable housing or stronger economic conditions are likely to be better equipped to handle the challenges of rising borrowing costs.

Rate Outlook: What to Expect in 2025

As variable rates are influenced by the Bank of Canada’s policy decisions, many homeowners are watching closely. Predictions suggest that the central bank may cut rates further throughout 2025, potentially bringing the overnight lending rate to 2.00% to 3.00% by Q4 2025 (Canadian Mortgage Trends). This could translate to variable mortgage rates starting at around 3%.

While this easing will offer some relief, it’s still a significant jump from the sub-2% rates many borrowers locked in during 2020. Homeowners need to prepare for the higher costs and adjust their financial strategies accordingly.

Strategies to Manage Higher Mortgage Payments

If your mortgage is maturing in 2025, there are several proactive steps you can take to manage the transition:

1. Start Early - Most lenders allow you to begin the renewal process 120 to 180 days before your term ends. Starting early gives you time to explore your options, negotiate rates, and secure the best deal.

2. Compare Lenders - Shop around or work with a mortgage broker to compare rates and terms. Switching lenders could save you thousands over your mortgage term.

3. Consider Short-Term Fixed Rates - With rates expected to decline further, opting for a short-term fixed rate (e.g., two or three years) may provide flexibility. This allows you to lock in a lower rate in the near future without committing to today’s higher costs.

4. Explore Variable-Rate Mortgages - Variable rates are directly impacted by the Bank of Canada’s rate cuts. If the central bank’s rate continues to fall, a variable-rate mortgage could offer significant savings over time. However, this option is better suited for those comfortable with some level of risk.

5. Extend Your Amortization Period - If the higher payments feel unmanageable, extending your amortization period can reduce monthly costs. For instance, extending your amortization period from 25 to 30 years could lower monthly payments by $200 on a $400,000 mortgage.While this increases the total interest paid, it’s a viable short-term solution for those under financial strain.

6. Make Prepayments Before Renewal - Consider making lump-sum payments or increasing prepayments to reduce your principal balance before renewal. This will soften the impact of higher interest rates on your payments.

7. Adjust Your Budget - Cut back on discretionary spending like vacations or dining out to free up funds for your mortgage payments.

8. Evaluate Investment Returns - If your investments yield lower returns than your mortgage rate, consider reallocating funds to pay down your mortgage instead. This approach can provide guaranteed savings by reducing interest costs.

Preparing for the Future

While rising rates present challenges, early preparation and strategic planning can help mitigate the financial impact. From exploring lender options to reassessing budgets, there are actionable steps to ensure you’re ready for what lies ahead.

Proactively work with your lender or mortgage broker to navigate mortgage renewal challenges. Stay informed, explore flexible options, and make strategic decisions to ensure long-term financial resilience and stability.