A wave of mortgage renewals is on the horizon for Canadian homeowners in 2025. At least 85 per cent of existing home loans were contracted when the Bank of Canada’s interest rate was at or below one per cent. This means more than one million homeowners will soon face significantly higher interest rates, creating what many experts are calling a “payment shock.”
While this shift poses challenges, there are strategies homeowners can use to navigate these rising costs and come out stronger on the other side. Let’s explore how Canadians can prepare for their mortgage renewal and make smart financial decisions to weather this economic shift.
What Is the 2025 Mortgage Renewal Wave?
The mortgage renewal wave refers to the large number of Canadian homeowners whose fixed-term mortgages will come up for renewal in 2025. Many of these mortgages were secured during a period of historically low interest rates, often at or below one per cent.
However, the economic landscape has changed dramatically. The Bank of Canada’s aggressive rate hikes to curb inflation brought interest rates to a 22-year high. Although rates have been cut by 175 basis points since last spring, they remain significantly higher than when these mortgages were first contracted. As a result, homeowners renewing their mortgages will likely face much higher monthly payments.
What Is “Payment Shock”?
Payment shock occurs when homeowners face a sudden increase in their monthly mortgage payments due to higher interest rates at renewal. For many Canadians, this shock will be substantial, especially for those who secured mortgages at historically low rates.
Example Scenario:
- Original Mortgage Rate: 1.5%
- Renewal Rate: 5.5%
- Original Monthly Payment: $1,500
- New Monthly Payment: $2,100
In this example, the homeowner’s monthly payment would increase by $600. For households already managing tight budgets, this increase could be challenging.
Strategies to Manage Mortgage Renewal in 2025
While rising payments are concerning, there are steps homeowners can take to reduce the impact of payment shock:
1. Start Planning Early
Don’t wait until your renewal date to start exploring your options. Contact your lender or a mortgage broker six months to a year before your renewal to discuss potential solutions.
Pro Tip: Early planning gives you time to shop around for the best rates and explore refinancing options if necessary.
2. Consider Refinancing
Refinancing your mortgage could help you secure a more manageable payment plan. By extending your amortization period, you can reduce your monthly payments.
Benefits of Refinancing:
- Lower monthly payments
- Access to home equity for other financial needs
- Potential to lock in a lower rate
Red Flag: Keep in mind that extending your amortization period means paying more interest over the life of the loan.
3. Negotiate with Your Lender
Don’t accept your lender’s first renewal offer without negotiating. Lenders often provide better rates to retain existing clients.
Tips for Negotiation:
- Use rate comparison tools to understand market rates.
- Ask about discounts for loyalty or bundling other financial products.
- Consider working with a mortgage broker to negotiate on your behalf.
4. Explore Variable Rate Options
While fixed rates provide stability, variable rates can offer more flexibility and potential savings, especially if interest rates start to drop in the coming years.
Considerations:
- Variable rates fluctuate with the market.
- They may offer lower initial payments compared to fixed rates.
Pro Tip: Discuss your risk tolerance with a broker to decide whether a variable rate is right for you.
5. Budget for Higher Payments
If you anticipate a significant payment increase, start adjusting your budget now. Identify areas where you can cut back on spending to make room for higher mortgage payments.
Budgeting Tips:
- Reduce discretionary spending (e.g., dining out, subscriptions).
- Prioritize paying down high-interest debt.
- Increase your emergency fund to cover unexpected expenses.
The Role of Mortgage Brokers in 2025 Renewals
A mortgage broker can be an invaluable resource during this renewal wave. Brokers have access to a wide range of lenders and can help you find the best rates and terms to fit your financial situation.
Why Work with a Broker:
- Access to Multiple Lenders: Brokers shop around on your behalf.
- Personalized Advice: Brokers tailor their recommendations to your needs.
- Negotiation Power: Brokers can often secure better rates than you would get on your own.
Pro Tip: Working with a local broker gives you the added benefit of personalized service and insights into your community’s housing market.
A Positive Outlook: Resilience and Opportunity
While the 2025 mortgage renewal wave presents challenges, it’s important to focus on the positives:
- Home Values Are Rising: In many parts of Canada, home values continue to appreciate, providing homeowners with increased equity.
- Rate Cuts Are Expected: Economists predict that interest rates will continue to decline as inflation stabilizes, which could reduce future mortgage costs.
- Financial Literacy Is Increasing: More Canadians are becoming aware of their financial options, empowering them to make smarter decisions.
By planning ahead and taking proactive steps, homeowners can turn this challenging situation into an opportunity to strengthen their financial position.
Final Thoughts
The 2025 mortgage renewal wave may bring payment shock for many Canadian homeowners, but with the right strategies, it’s possible to navigate these changes successfully. Start planning early, explore your refinancing options, and consider working with a mortgage broker to ensure you’re getting the best possible terms.
Need help preparing for your mortgage renewal? Contact The Local Broker for personalized advice and support to make your transition as smooth as possible.
