One in four homeowners set for lower reset rates, meaning less pressure for rapid cuts
Although concerns over rising rates and their impact on homeowners have fuelled calls for aggressive rate cuts, TD economists believe the situation may not be as severe as anticipated.
About a quarter (25%) of Canadian mortgages set for renewal in 2025 will reset at a lower rate, contrary to widespread expectations.
“Homebuyers responded to a once-in-a-generation deal on mortgage rates. Now as 2025 approaches, those renewing a five-year mortgage – the preferred term in Canada – could face sticker shock,” TD’s chief economist Beata Caranci and economist Maria Solovieva wrote.
These homeowners opted for shorter mortgage terms, anticipating that rates would fall further by the time their renewals arrived. Their gamble appears to have paid off, with current five-year fixed rates hovering between 4.0% and 4.7%, down from the higher transaction averages of 5.8% to 6.9%.
The majority of mortgage holders facing renewals in 2025 and 2026 originally secured their loans at an average rate of 2.5%. For these homeowners, monthly payments are expected to rise. However, the TD Economics report suggested that the increases may be manageable.
Since 2020, home prices and wages have both increased by over 30%, giving many homeowners greater equity and financial flexibility. This equity could enable them to extend their amortization periods, easing the strain of higher payments.
Homeowners with variable-rate mortgages have already seen some relief thanks to the 125 basis points in rate cuts introduced so far, which translate to savings of about $370 per month on a $500,000 mortgage.
Additionally, those whose payments don’t adjust immediately with rate changes are likely to see benefits at renewal, either through lower payments or shorter loan terms. The report also found that many borrowers have taken proactive steps, such as increasing their payments to reduce their amortization periods by an average of one year.
TD highlighted that Canada’s strict mortgage stress test has created an additional buffer for homeowners. The test requires borrowers to qualify at a rate at least two percentage points higher than their contract rate or at a minimum of 5.25%, whichever is greater.
This means that many homeowners who locked in lower rates around 2% in 2020 are still operating within the safety margins of the stress test.
“If they qualified then for a mortgage, they should be sitting in a better spot today with the benefit of time and wage gains,” Caranci and Solovieva noted, especially as job market conditions have remained stable.
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While the idea of large rate cuts is appealing to some, TD warns that moving too quickly could have unintended consequences. A rapid decrease in rates could fuel consumer spending and reignite the housing market, leading to higher household debt and renewed affordability issues. The report stresses that the Bank of Canada needs to balance these risks carefully.
In addition, significant rate cuts could widen the interest rate gap between Canada and the US, potentially weakening the Canadian dollar and affecting the country’s purchasing power abroad.
“The loonie has already broken below a technical threshold by dipping below 72 cents,” TD’s report stated, noting that persistent currency weakness could become a barrier to investment as companies often rely on imported machinery and equipment.
“Bottom line,” the economists said, “we must remember, there is such a thing as too much of a good thing.”
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