Lenders, economists weigh in on the impact of lower rates on mortgage renewals
The Bank of Canada’s recent decision to slash its policy rate by 50 basis points to 3.25% has reshaped the narrative around mortgage affordability in Canada. While the move offers relief for many borrowers, experts said that the impact will vary, with some homeowners still facing significant financial challenges.
This fifth rate cut reflects a pivot in the central bank’s priorities, shifting from controlling inflation to addressing economic headwinds, including slowing wage growth and rising unemployment.
“Slowing wage growth and unemployment at a seven-year high—excluding the pandemic—signal that the economy needs support,” said CPA Canada chief economist David-Alexandre Brassard. “The decision to cut rates now will provide relief ahead of potential tariff turbulence under Trump’s administration.”
This supersized December rate cut comes as Canada grapples with six consecutive quarters of declining GDP per capita and rising unemployment.
"With another aggressive, eye-popping jumbo cut in the books, the Bank has made it clear that it sees room to accelerate relief without compromising price stability,” said Shannon Terrell, NerdWallet Canada spokesperson and financial expert. “The cut is most certainly the Bank’s response to clear distress signals in the job market. This slash reflects the growing concern that high rates while having tamed inflation, may have overcooled the economy.
“The coming months will show if this full-throttle approach to monetary easing pays off or sends the economy skidding."
Mortgage relief
For mortgage holders, the cuts have lessened fears of a widespread mortgage renewal "shock," which once dominated economic forecasts. According to CIBC economists Benjamin Tal and Katherine Judge, the scenario of widespread payment increases has largely shifted from a macroeconomic issue to a more targeted, borrower-specific challenge.
Tal and Judge estimate that about 40% of mortgages set for renewal in 2025 will result in lower monthly payments, while another 10% will see increases of less than 10%. However, the remaining 50% of borrowers are expected to face a 20% rise in payments on average.
“The focus should be on the micro space in terms of potential delinquency rates” rather than a macroeconomic crisis, the CIBC economists said.
“While the expected rate cut will ease debt repayment burdens for mortgage holders in particular, it won’t reverse price hikes,” added Li Zhang, CPA Canada’s financial literacy leader. “As the holiday season approaches, Canadians should create budgets and stick to them, resisting the urge to overspend regardless of interest rate cuts.”
The recent cuts have brought immediate relief for variable-rate mortgage holders, as Canadian banks typically align their rates with the central bank. For a $600,000 mortgage, the cumulative cuts so far translate into monthly savings of around $630.
Borrowers with fixed-rate mortgages, however, may not see the same benefits, as these rates are tied to bond markets and don’t always move in tandem with the Bank of Canada’s adjustments.
For many Canadians, the decision to switch from variable to fixed rates ahead of the cuts helped mitigate financial strain. TD Bank estimates that 14% of the $520 billion in variable-rate mortgages were either prepaid or converted to fixed-rate loans by the end of 2022.
“Looser” conditions
Several factors have contributed to the reduced proportion of borrowers facing severe payment shocks.
TD Bank noted that many mortgage holders opted to "front-load the payment shock" by switching from variable to fixed-rate mortgages, with 14% of the $520 billion in variable-rate mortgages either prepaid or refinanced into fixed rates by the end of 2022.
Additionally, "looser financial conditions and heightened competition among lenders" have driven available rates lower than expected.
In addition, competition among lenders has driven mortgage rates lower than expected. TD Bank reported that variable rates dropped an additional 42 basis points beyond the anticipated impact of the central bank’s moves.
Read next: Latest big rate cut could spell good news for homebuying
This competitive environment, combined with growing incomes and a stress-tested borrower base, has helped mitigate the risks of higher mortgage payments. BMO economist Robert Kavcic pointed out that many borrowers were tested at rates of around 5.25% when they took out loans during the pandemic, preparing them for today’s higher rates.
The rate cut also coincides with upcoming policy changes in Ontario and British Columbia, where down payment requirements for homes priced between $1 million and $1.5 million are set to decrease. These measures are expected to boost housing market activity, particularly among those who can afford the resulting mortgages.
"Rates are coming down days before buyers in Ontario and BC will receive what could be a major leg-up — lower down payment requirements for homes priced between $1 million and $1.5 million,” said NerdWallet spokesperson Clay Jarvis. “Not all buyers will be able to afford the resulting mortgages, but those who can will be pouncing."
Despite these positive trends, potential risks remain. Kavcic warned that rising unemployment or unexpected economic disruptions could challenge the Bank of Canada’s easing strategy.
“If Canadians are employed, they’ll pay the mortgage first, but deeper problems will emerge with job loss,” he said.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
