It’s been five years since the Bank of Canada lowered its overnight rate to .25% to stimulate the Canadian economy in the face of the COVID-19 pandemic.
One part of the economy that felt the stimulus perhaps more than any other sector was housing, as millions of Canadians took out mortgages and bought homes, taking advantage of the low rates.
Those low-rate days are gone, for now, and approximately 1.2 million home owners are renewing their mortgages, including 85% who took out their mortgages when the bank’s key lending rate was at or below 1%, according to a Royal Lepage survey conducted by Hill & Knowlton and released on Thursday.
The survey found 57% of respondents who are renewing their mortgages this year expect their monthly payments to increase upon renewal, with 35% expecting a slight increase and 22% expecting a significant increase.
Another 25% say their monthly payment will stay the same, or within $100 of their current payment, with 15% expecting a decrease in payments upon renewal.
“When it comes to post-pandemic mortgage renewals, many Canadians have avoided the worst-case scenario of having to sell their homes due to the inability to cover the cost of their mortgage, thanks to solid employment trends and declining interest rates,” said Phil Soper, president and CEO, Royal LePage. "Nevertheless, some will face a substantial rise in their mortgage costs, putting added pressure on their household finances. Many in this situation are exploring options to lower their monthly fees, such as extending their amortization period; a tactic which has proven popular.”
Of survey respondents who are expecting an increase, 81% say it will be a financial strain, with 47% expecting the strain to be slight and 34% expecting a significant strain.
Among them, 60% of respondents say they will reduce or eliminate discretionary spending to help cope with the impact of increased monthly mortgage payments, while 43% say they will reduce or eliminate travel; 36% will reduce or eliminate saving or investing; 34% will reduce spending on essentials, such as gas and groceries; and 23% will obtain a second job or find another source of income. (Respondents were able to select more than one answer.)
“Even in challenging financial times, Canadians continue to prioritize home ownership and paying down their mortgages, cutting back on other spending and even savings, if absolutely necessary,” said Soper. “Delinquency rates in Canada remain extremely low, arguably the lowest among advanced economies worldwide, despite the rising cost of living and household debt. For example, the rate of mortgage default in the US is more than fifteen times higher.”
(Canada Mortgage and Housing Corporation said the mortgage delinquency rate rose to 0.2% in the third quarter of 2024, but remains well below pre-pandemic levels and historical averages.)
“With so many homeowners set to renew their mortgages at higher rates in 2025, many are already preparing to tighten their budgets, redirecting funds from savings, hobbies or vacations to ensure they can meet their mortgage obligations,” said Soper.
The majority of respondents (62%) do not plan to make major lifestyle changes to cope with increased housing expenses to avoid potentially higher monthly mortgage costs.
However, 11% are considering relocating to a more affordable region; 10% are considering downsizing; and 10% are considering renting out a portion of their home to subsidize expenses. (Respondents were able to select more than one answer.)
According to the survey, 66% of respondents renewing their mortgages this year say they plan to obtain a fixed-rate loan (down from the 75% who currently hold fixed-rate mortgages), and 29% say they will choose a variable-rate loan (up from the 24% who currently hold variable-rate mortgages).
“Since last summer, the Bank of Canada has made several cuts to its overnight lending rate amounting to a decline of 200 basis points thus far, driving variable mortgage rates down in tandem. For homeowners looking to reduce their monthly payments or pay down their principal faster, variable-rate mortgages have become an increasingly attractive option in light of today’s declining rate environment and the likelihood of further cuts this year,” said Soper, adding the bank’s overnight rate is likely to move lower.
“In its first policy rate announcement of 2025, the Bank of Canada signaled a shift, noting it would prioritize economic growth over inflation control in response to rising trade tensions. In the short-term, this could lead to more aggressive cuts to the overnight lending rate if the central bank deems it necessary to shield the Canadian economy from the fallout of an unprecedented trade dispute,” he said.
“While a trade war with our southern neighbour offers little economic benefit, new homebuyers and those renewing a mortgage this year may find a silver lining in lower borrowing rates. If the Bank of Canada is forced to take measures to bolster a weakening economy, we could see faster and deeper rate cuts, at least in the short term.”
The bank's next scheduled rate announcement is March 12.