Renewing your mortgage in 2025? Here’s what to expect

Canada’s mortgage rate outlook has been anything but predictable in recent years, and 2025 will be no exception. Rapid rate cuts, shifting bond yields, and economic surprises – such as threatened US import tariffs – have caused mortgage rates to fluctuate, and the path forward for borrowing costs remains uncertain. 

That can make it especially challenging for mortgage holders who are coming up for renewal this year – and there are plenty of them. More than 1.2 million Canadians will need to renew their existing term in 2025, according to the Canadian Mortgage and Housing Corporation (CMHC). Additional research from the Bank of Canada pins the number at 60% of all outstanding mortgages by the end of 2026.

All of this points to the so-called mortgage “renewal wave”; the expected onslaught of renewals taking place this year and next, many of which will be renewing at a considerably higher rate than the borrower originally got. This is because in 2020 – when the majority of today’s borrowers first took out their five year terms – rates sat at record lows. The onset of the pandemic, and resulting economic uncertainty, had led the Bank of Canada (BoC) to deeply slash its trend-setting overnight lending rate, which governs the price of variable-rate mortgages, to a historic 0.25%. Fixed mortgage rates also plunged at this time as bond yields steeply dropped, hitting a modern-era low of 0.3% in August of that year. That resulted in both fixed and variable mortgage rates available below 1.5% at the absolute trough.

While mortgage rates today are lower than where they sat during much of 2023 and 2024, they’re still materially higher than pandemic-era mortgage pricing. Given this, it’s not surprising that borrowers and analysts alike are concerned about the financial fallout. According to a recent survey conducted by Royal LePage, 57% of the Canadians renewing their mortgage this year expect that their payment will increase; of them, 81% expect it will put financial strain on their household. The BoC analysis has a similar outlook, calling for 40% of all outstanding mortgages to see higher payments at renewal time.

Here’s what you can expect if you're renewing your mortgage in 2025.

Equity and improved flexibility

A positive note is that renewing borrowers tend to be on more solid financial ground; after all, they’ve made regular payments over their previous term to whittle their principal balance and build up equity, which can provide them with more options at renewal time.

According to the BoC’s research, while some of these borrowers will face “large payment shock”, they’ll also benefit from additional flexibility.

“This is because they will have paid down part of their principal over those five years, while also potentially seeing an increase in their income or the value of their property. These borrowers will therefore have room to refinance their mortgage if needed,” states the BoC’s research.

The central bank’s analysis also finds that:

• As of September 2024, around 70% of outstanding mortgages have a current loan-to-value ratio of 65% or less.
• The median amount of principal owing on outstanding mortgages is $245,000.
• The largest share of those renewing this year and next hold five-year fixed mortgage terms.
• Close to half of current outstanding mortgages have an amortization of over 30 years, with most initially taking out a 25- or 30-year term.

The BoC also finds that fixed-rate mortgages continue to be the overwhelming choice, representing around 80% of all outstanding mortgages, and 90% for high-ratio, insured borrowers (those who’ve paid less than 20% down on their home purchase).

However, a shift in preference toward shorter fixed-rate terms – such as three- and two-year terms – became more prevalent in mortgages that were taken out in 2024, particularly among those with more than 20% equity in their properties. In fact, shorter-term fixed mortgages made up 74% of all new low-ratio mortgages last year, reflecting borrowers’ desire to limit the length of time they’re locked into a higher rate, while building in the opportunity to make a change to their mortgage sooner. This has been an especially popular strategy among borrowers while interest rates were elevated.

Less trigger rate risk

The good news is, this year’s mortgage renewal picture looks less dire than it in 2022 and 2023; that was when the BoC hiked its trend-setting rate a historic 10 times in a row, yanking it up from those pandemic lows to a high of 5% in response to soaring inflation. It then held the rate here between July 2023 and June 2024.

This rapid increase in borrowing costs put enormous financial pressure on Canadian mortgage shoppers, but the pain started to ease this past summer, when the BoC reined inflation back to its 2% target. The central bank has since cut its rate a total of six successive times since June 2024, easing it back down to 3%.

A unique risk for borrowers over the last two years has been hitting their trigger rate – the point at which the monthly interest payment equals that of the principal payment – or the more serious trigger point, which indicates that, due to ballooning payments, the borrower now owes more on their mortgage than what the home is worth. This is also referred to as negative amortization.

This risk was specific to variable-rate mortgage holders who were on a fixed payment schedule, also called “VFM” mortgages. This is because, as the BoC hiked rates, variable mortgage interest payments increased in tandem; however as the payment size never changed, less and less of that payment went toward the principal balance as rates rose.

However, lenders have worked closely with these borrowers to prevent negative amortization, such as temporarily extending their amortizations to a much longer time frame. The risk of hitting the trigger rate or point also diminished once the BoC started cutting rates again in June. Now, according to the BoC, just 12% of VMF mortgages – accounting for 2% of all mortgages – were in negative amortization as of September 2024.

Diminshed “payment shock”

Additional commentary from TD released in November indicates the payment shock “cliff” that once faced borrowers has greatly improved. This is because borrowers proactively took steps to minimize their exposure to rising rates, such as refinancing into fixed mortgages and increasing the size of regular payments to pay down their mortgages faster, as well as prioritizing debt repayment through budgeting.

“Our analysis suggests that mortgage renewals are going to be less stressful for households than previously feared, with aggregate payments on Canadian mortgages poised to decline for balances outstanding as of mid-2024,” states the analysis, which was written by TD Economist Maria Solovieva.

“In fact, many Canadians who renewed or initiated their mortgages at the interest-rate peak opted for shorter terms, positioning themselves to reset their mortgages at a LOWER interest rate in the coming year thanks to a significant reduction in interest rates… While we still expect consumers to remain cautious overall, this positive trend could offer a boost to consumer spending in 2025.”

The TD analysis states that for the mortgages outstanding as of mid-2024, payments will decline by 1.2% in 2025, compared to the previously expected 0.5%.

“This reduction will occur despite a higher-than-expected $75 billion (or 3.5%) increase in household mortgages outstanding to date,” states the study.

But what about tariffs?

Of course, the threat of proposed 25% blanket tariffs on Canadian imports to the US throws additional doubt onto the mortgage rate outlook. Factors such as how – and if – the tariffs are actually implemented, for how long, and  whether Canada retaliates with our own, will skew how the economy performs, how markets react, and the Bank of Canada’s next steps.

It’s largely expected that if tariffs become a reality, the central bank will need to slash its benchmark rate by a larger degree, perhaps as low as 1.5%. While that would provide borrowers with some considerable rate relief, it would be small comfort if Canadians are facing the effects of job loss and a recession. 

Fixed mortgage rates have also dropped in the wake of tariff threats, as bond investors react to uncertainty and fears of inflation. That’s provided today’s rate shoppers with better options than in previous months, but it’s hard to gauge how long lower pricing will last.

In a speech made to the Mississauga Board of Trade-Oakville Chamber of Commerce on February 21, BoC Governor Tiff Macklem wrote that Canada hasn’t experienced tariffs of this nature since the 1930s, and that, unlike the last economic downturn during the pandemic – which was followed by a rapid recovery – there wouldn’t be a “bounce-back.” Canada’s economic output would essentially experience a “structural change”, and be permanently lower. As a result, the BoC’s model shows implied tariffs would entirely wipe out economic growth over 2025 and 2026.

In this instance, the BoC’s main job would be to help the economy adjust – but it can’t do that by tweaking rates alone.

“[With] a single instrument—our policy interest rate—we can’t lean against weaker output and higher inflation at the same time. As we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from weakness in the economy and weigh that against the upward pressure on inflation from higher import prices and supply chain disruptions,” Macklem said.

Translation for borrowers: whether or not lower rates will come will be highly dependent on the form tariffs take, and their resulting impact on inflation.

Advice for renewing mortgage borrowers

Don’t sign your lender’s renewal letter

This may surprise some mortgage holders, but if you receive a letter from your existing lender offering you a new renewal rate and term, don’t sign it right away; while it’s certainly convenient to lock right back into another mortgage term with the stroke of a pen, you’ll almost never be offered a competitive rate if you do so. Instead, weigh your options at other lenders and consider making a switch; you may be offered a lower rate and more competitive product features, which can help save thousands of dollars over the course of your mortgage. Working with a mortgage broker or agent, who has access to multiple rates from multiple lenders, can help make the shopping process a snap – and it’s free.

Today’s renewing borrowers will also have more leverage with lenders than they did in the past. Given the large volume of business up for grabs, banks will be keen to score as many clients as possible, which could lead to “mortgage war” rate pricing – yet another reason to shop around for your options.

New stress test exemptions for straight-switch renewal clients have also made it easier to leave one lender for another at renewal time. Even if you choose to stick with your existing lender after all, understanding your options can give you more negotiating power to score the best rate possible.

Start the process early

The key to having the most choice and flexibility at renewal time is to start shopping early – even by as much as six months ahead. While rate holds at lenders typically last for 120 days, it may make sense to commit to the lowest rate available now, and assess in three months whether to break your existing mortgage slightly early, or extend another rate hold until your original maturity date. Taking this approach offers you the lowest possible rate now while leaving your options open should rates fall further in the near future – and protects you if they increase.

Prepare your budget

If you know your financial situation – such as your monthly mortgage payments – is going to change at renewal time, do what you can now prepare, and perhaps make a change that will help lessen the shock. For example:

Assess your risk tolerance: Variable mortgage rates are generally expected to trend lower than fixed rates in 2025. This could present considerable savings for a borrower willing to take on the risk. However, given today’s economic outlook can quickly change, ensure your budget could handle it if rates suddenly did increase. 

Consider a shorter mortgage term: While five-year terms continue to be the most popular in Canada, shorter terms have increased in popularity, as they provide both shelter from any immediate market volatility, while coming up for renewal sooner – which means you can switch up your rate at that time without a penalty. If you feel that mortgage rates will trend lower within the next few years, this can be a good strategy. As well, a shorter term can make more sense if you plan to move or sell your home.

Also read:

• The state of mortgage renewals in Canada: Insights from the CMHC
• Understanding the mortgage renewal process
• What to know about early mortgage renewal
• Avoiding 7 common pitfalls during your mortgage renewal