Can't afford your mortgage renewal? Here's your action plan

Are you dreading your upcoming mortgage renewal due to rising interest rates? You're not alone. With over 1.2 million mortgages up for renewal in 2025, many Canadians share your concerns about higher payments and potential financial strain. 

This guide will walk you through what happens if you can't pay your mortgage in Canada and provide practical strategies to help you navigate this challenging time.

What happens if you can't pay your mortgage in Canada?

In today's economic climate of rising interest rates and increasing living costs, meeting mortgage obligations has become a harsh reality for many. A report by Mortgage Professionals Canada (MPC) reveals that one in 10 Canadians struggle to make their mortgage payments.

Let’s see what happens if you miss mortgage payments:

• Late fees and penalties: The first and most immediate consequence includes the late fees and penalties your lender charges. These additional charges can quickly increase your overall debt, making it even more challenging to catch up on future payments. The unpaid amount may accrue extra interest, further escalating the total cost of your mortgage over time. 
  
  
• Damage to credit score: Your lender reports each missed mortgage payment to credit bureaus, causing your credit score to decline. A lower credit score significantly hinders your ability to obtain credit in the future, whether it's for credit cards, personal loans, or even renting an apartment. Even if a lender approves your credit despite a lower score, they likely charge you higher interest rates due to the increased risk they perceive.
  
  
• Legal actions: Continued missed payments can result in a default mortgage that triggers the “acceleration clause,” a provision in your mortgage agreement that allows the lender to demand immediate payment of the remaining mortgage balance. If you cannot satisfy this demand, the lender may initiate legal proceedings like wage garnishments. Under this legal discourse, your lender obtains a court order requiring your employer to deduct a set amount from your paycheck to satisfy the debt. 
  
  
• Foreclosure: 85% of the mortgage renewals coming up in 2025 were originally contracted when the Bank of Canada’s policy rate was at or below 1%. With the rate now standing at 3.75%, a vast majority of these homeowners will face significantly higher interest rates upon renewal. This may increase the risk of foreclosure for some overextended borrowers.
  
  Under foreclosure, the lender takes possession of your property when you fail to make payments. The process typically begins with a Notice of Default, followed by a redemption period during which you have a limited time to pay the overdue amount and stop the foreclosure. If unresolved, the lender sells your property, often at a public auction. In case the sale does not cover the full mortgage balance, you’ll still owe the remaining amount.
  
  Also read: Can your mortgage lender force you to sell your home?

Options when you can't afford your mortgage renewal

The MPC report also found that two-thirds of homeowners feel anxious about the renewal process. Fortunately, we’ve listed the top strategies to take control of your renewal process with confidence.

1. Negotiating with your lender

Lenders are often more accommodating than you might expect, especially if you approach the conversation proactively and transparently. You could negotiate for: 

• Making interest-only payments for a set period. 
• Lowering your interest rate based on market conditions.
• Adding missed payments to your balance and spreading them over the repayment period.

2. Considering a payment deferral

A payment deferral allows you to temporarily pause or skip your mortgage payments for a specific period, typically up to four months. 

While you won't need to make your usual mortgage payments during this period, it's important to note that interest continues to accrue on your outstanding balance. At the end of your deferral period, your lender will add the deferred interest to your principal, resulting in a higher overall balance. You might need to either increase your monthly payment amount or extend your amortization period to cover the increased balance.

The Financial Consumer Agency of Canada lists the following eligibility criteria for payment deferrals:

• You haven’t missed any payments before requesting a deferral.
• The property must be your principal residence, not a secondary or investment property.
• You’re experiencing financial difficulties due to extraordinary circumstances, such as job loss or medical emergencies.
• You’ll be at the risk of defaulting on the mortgage.

3. Extending your amortization period

Go to your lender and ask if you can change the amortization period at renewal for a longer timeframe. This adjustment can significantly lower your monthly payments, making them more affordable.  

However, it’s important to note that extending the time period will result in higher interest payments over the life of the mortgage. Additionally, a longer amortization period will cause you to build equity in your home more slowly, affecting your ability to leverage that equity for other financial needs.

Let’s assume you have a $300,000 mortgage at a 4% interest rate and a 25-year amortization period. Using our mortgage renewal calculator, your monthly payment and total interest would look like:

By extending the amortization period from 25 to 30 years, your payments would become:

By extending the amortization from 25 to 30 years, your monthly payment decreases by $151. However, the total interest paid over the life of the mortgage increases by $40,560.

4. Consolidating debts

Having multiple high-interest debts such as credit cards, personal loans, and lines of credit can eat into your budget, making it difficult to manage increased mortgage payments. By consolidating debts into a single loan, you replace multiple payments with one simplified payment, often at a much lower interest rate. 

Here are the various options to combine your debt:

• Home equity line of credit: A HELOC allows you to borrow against the equity you've built up in your home. It's a revolving line of credit that you can use to pay off other debts. 
• Debt consolidation loan: These unsecured loans combine your debts into one manageable monthly payment, often at a fixed interest rate. This option doesn't require using your home as collateral, reducing the risk to your property.
• Balance transfer credit card: If you have multiple high-interest credit debts, you can transfer all the balances to a card at a lower rate. These cards offer a low or zero percent introductory interest rate for balance transfers.
• Second mortgage: A second mortgage is a new, separate loan that you take out using the equity in your home as collateral. It does not replace your existing mortgage. Instead, it acts as an additional loan that you repay alongside your primary mortgage. 

5. Switching to another lender

When your mortgage term ends, you have the freedom to shop the market and switch lenders without paying a penalty to break your mortgage. Compare quotes from multiple lenders to identify competitive interest rates and other benefits, such as flexible payment options or cash bonuses. Even a small reduction in your interest rate can lead to significant savings over the course of your mortgage. Borrowers who are making a “straight switch” – meaning the size of their original mortgage amount or amortization remains the same – may also be exempt from the mortgage stress test if they’re going from one federally-regulated bank to another.

Check out the best mortgage renewal rates

If you face challenges qualifying with a traditional lender, you can consider:

• B lenders: These lenders cater to borrowers who may not meet the stringent criteria of major banks, such as those with bad credit scores, self-employed individuals, or those with irregular income. They typically offer higher interest rates than A lenders but provide greater flexibility for qualification.
• Private lenders: These lenders focus primarily on the value of your property rather than your financial profile, providing maximum flexibility. However, private mortgage loans often come with significantly higher interest rates and fees, making them viable as short-term solutions.

6. Changing to a fixed-rate term

If you currently have a variable-rate mortgage and are worried about rising interest rates, consider switching to a fixed mortgage. 

According to the 2024 CMHC Mortgage Consumer Survey, 67% of consumers opted for fixed-rate mortgages, while 23% chose variable-rate mortgages in 2024. Additionally, variable-rate holders are nearly six times as likely as fixed-rate holders to regret becoming homeowners. These statistics underscore the potential stress and uncertainty associated with variable rates, especially during periods of economic volatility.

However, it's important to consider that fixed-rate mortgages historically come with slightly higher initial interest rates compared to variable-rate options. Additionally, if market rates drop, you won't benefit from lower payments since your rate is locked in.

7. Filing a consumer proposal

If overwhelming unsecured debts are making it difficult to keep up with your mortgage payments, filing a consumer proposal might be an option. This is a formal agreement arranged through a Licensed Insolvency Trustee (LIT) in Canada, where you negotiate with your unsecured creditors to repay a portion of your debts over a period of up to five years. By reducing your overall debt load, you free up more income to cover your mortgage payments.

Keep in mind that this program is available to individuals who cannot pay their debts as they come due and whose total unsecured debts do not exceed $250,000 (excluding debts secured by your principal residence). While a consumer proposal allows you to retain your assets, it will affect your credit rating and remain on your credit report for three years after completion.

The bottom line

Facing a mortgage renewal you can't afford is undoubtedly stressful. But don't let the stress freeze you into inaction. With a proactive approach and a sprinkle of optimism, you'll find a path that keeps you on track toward your homeownership dreams. 

Also read:

• 5 tips for mortgage renewal time
• Should you switch from a variable-rate to a fixed-rate mortgage?
• The state of mortgage renewals in Canada
• Can I get a 30-year mortgage in Canada?
• How early should I renew my mortgage?