Canada’s housing market is gearing up for a dynamic and potentially challenging year in 2025. Several key factors will influence housing prices and mortgage trends, including interest rate adjustments, shifting demand, and policy changes. Let’s start with reasons to be optimistic about mortgages in 2025:

Renewal Wave Expected

A surge in mortgage renewals is anticipated, with around 100,000 monthly renewals. Since most of these originated before mid-2022, when interest rates were significantly lower, lenders are likely to compete aggressively to retain clients. At the same time, borrowers may be more inclined to explore better offers.

Simplified Switching Process

Switch activity is set to rise, as many borrowers transferring their mortgages will benefit from relaxed qualification rules, including exemption from the federal stress test.

30-Year Amortizations Enhance Affordability

First-time homebuyers and purchasers of newly built properties can stretch payments over 30 years on insured mortgages, which offers more purchasing power and facilitates qualifying for higher loan amounts.

Wages on the Rise

Annual income growth exceeding 4% is improving borrowing capacity. As incomes increase faster than inflation, more buyers qualify for mortgages, and higher loan amounts will become accessible.

Property Values Expected to Climb

Predictions of home price increases exceeding 4% could drive up the average size of new purchase mortgages, especially for buyers making a 20% down payment.

Higher Cap on Insured Purchases

The insured property limit was raised from $1 million to $1.5 million, broadening the range of properties eligible for insured financing and stimulating growth in higher-priced home purchases.

Better Sentiment Among Buyers

Many buyers postponed their purchases during periods of high rates and poor affordability. As market conditions stabilize, pent-up demand could increase homebuying activity in 2025.

Potential Economic Upswing

If unemployment peaks and the economy stabilizes, as economists and the IMF expect, job growth could drive housing demand and support mortgage market growth by year-end.

Variable Rate Relief Possible

While fixed rates may experience modest upward pressure, variable rates could decrease by up to 50 basis points. This would reduce qualifying rates and improve borrowers’ affordability with variable mortgages. Variable-rate mortgages (VRM) would be paid off sooner, and adjustable-rate mortgages (ARM) would benefit from reduced mortgage payments.

New Refinance Option for Homeowners

Starting mid-January, homeowners can refinance up to 90% of their property’s value for secondary suite construction under the Canada Secondary Suite Loan Program (CSSLP), potentially boosting refinancing activity in niche segments.

Interest Rates and Monetary Policy

The Bank of Canada will likely continue gradually reducing interest rates in small (25 basis point) increments, provided inflation remains controlled and unemployment rises. This measured approach aims to balance economic growth with financial stability. While rate cuts may encourage borrowing, mortgage rates—particularly fixed ones—may not follow the same downward trend. Various factors, such as bond market movements and economic uncertainties, could result in periods of rate volatility with swings of 50–60 basis points.

While Canadian fixed-rate mortgages are expected to remain unchanged or increase due to pressure from US treasury bills, discounts for variable-rate mortgages continue to disappear as banks see the BoC providing further cuts to the policy rate.

Increased buyer activity is expected if interest rate reductions persist, especially with relaxed lending rules. These include higher borrowing limits and extended amortization periods, helping to improve affordability for a broader range of buyers.

Housing Market Dynamics

Reduced immigration and the expiration of many temporary resident visas could soften housing demand. In addition to economic incentives, more Canadians may consider relocating to the United States, further shrinking the buyer pool. These factors could shift the market from undersupply to oversupply, especially in urban areas where condominiums are already facing lower demand.

Property prices remain high, and without significant wage growth, further corrections may be necessary to align home prices with buyer affordability. The condominium segment may experience the most critical pressure, particularly in major markets, where high inventory and weak demand could lead to price reductions. In some regions, declining investor interest has already resulted in a sharp drop in new condo sales, with potential oversupply lingering into 2025.

The construction sector, meanwhile, faces its challenges. Labour shortages and an aging workforce continue to affect project timelines, making it challenging to meet ambitious housing supply goals. Some cities seek innovative solutions, such as AI-powered permit approvals, to streamline processes and reduce delays.

Economic Indicators

The Canadian dollar has recently depreciated, and short-term volatility is expected to persist. However, depending on how trade policies and other macroeconomic factors evolve, there is potential for a rebound in early 2025. Fluctuations in currency, interest rates, and asset values will likely create an unpredictable financial environment, underscoring the need for careful planning among consumers and investors.

Market volatility is expected to remain a key theme throughout the year. With so many changing conditions and variables, anyone involved in the housing market must be flexible and informed.

Policy Considerations

Upcoming federal elections could result in new housing policies to improve affordability and market stability. These changes could affect everything from taxation to development incentives. In British Columbia, a new flipping tax targeting property speculators took effect on January 1st. This measure, which taxes properties sold within two years of purchase, is designed to curb speculative activity and increase housing availability. Meanwhile, proposals to eliminate the GST on newly built homes under $1 million may stimulate construction.

Recommendations for Stakeholders

Unlike Canada’s typical 5-year fixed mortgage terms, the United States offers longer mortgage terms, usually up to 30 years. While this gives US borrowers rate stability, it also transfers interest rate risk to lenders, reducing underwriting standards. In Canada, lenders prefer shorter mortgage terms due to regulatory factors like the Interest Act. This law allows borrowers to repay with only a 3-month interest penalty after the initial five years, limiting lenders’ ability to manage long-term risks.

Countries like Australia and Norway, where variable-rate mortgages (VRM) are the norm, expose borrowers to interest rate fluctuations, amplifying financial stress during economic volatility. Canada’s balance between fixed and variable products within shorter terms provides flexibility but requires careful consideration of mortgage risks in Canada.

Housing Affordability: Supply, Demand, and Policy Interventions

Homebuyers: For those planning to enter the market, closely monitoring price trends and interest rate movements is essential. While there may be opportunities to take advantage of lower borrowing costs, fluctuating rates and potential policy changes mean timing and preparation will be key. With wages expected to rise and interest rates trending lower, more millennials and Gen Z buyers could finally leap into homeownership over the next few years.

Investors: Navigating the real estate market in 2025 will require a thoughtful approach. Diversifying investments and paying close attention to emerging trends—such as the growing demand for purpose-built rentals—could offer opportunities. Cross-border investments are also expected to play a significant role, with several US companies planning large-scale investments in Canada’s rental housing market, possibly boosting rental supply in major cities.

Mortgage Professionals: Given the complex environment, staying informed about policy updates, interest rate changes, and housing market dynamics will be critical. Many homeowners will face interest rate increases as mortgages are renewed at higher rates in 2025, potentially increasing default risks. Lenders, advisors and mortgage brokers should be prepared to guide clients through refinancing options and new financial realities, especially as banks have set aside significant reserves to manage potential credit losses.

Final Thoughts

In summary, the outlook for 2025 points to a year of adjustment and opportunity in Canada’s housing and mortgage markets. Interest rate cuts, changing demand dynamics, and evolving policies will shape the landscape, requiring market participants to stay adaptable. Whether you plan to buy, renew, refinance, invest, or guide clients through the home financing process, a strategic approach will be essential to navigating this year’s economy. 

Why not contact nesto mortgage experts and get started on your smart mortgage strategy today?

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