As Canada’s economy faces fluctuating mortgage interest rates, high inflation rates, and ongoing housing affordability challenges, the Canadian mortgage market is under close watch. Carolyn Rogers, Deputy Governor of the Bank of Canada, recently highlighted the balance needed between supporting affordable housing in Canada and managing the long-term stability of Canada’s mortgage sector. Here, we explore the key risks facing Canada’s mortgage market, the potential impacts on borrowers and lenders, and what these dynamics mean for the future of homeownership in Canada.

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Key Takeaways

• Variable rates may drop as expected rate cuts by the BoC could ease monthly payments on adjustable mortgages.
• Despite potential rate cuts, fixed rates might stay high due to bond yields and US economic pressures.
• Given the diverging trends between fixed and variable rates, a personalized financial strategy is crucial.

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Economic Risk Posed by the Mortgage Renewal Wall

Canada’s upcoming mortgage renewal wall is a significant challenge. Approximately 60% of existing mortgages in Canada will need to be renewed in the next two years, with many Canadian homeowners facing mortgage rate hikes. This could strain household budgets and reduce consumer spending, slowing economic growth. Higher mortgage payments also increase the risk of mortgage defaults, potentially affecting Canadian lenders, mortgage insurers, and investors.

At a recent speech at the Economic Club of Canada, Bank of Canada’s Senior Deputy Governor Carolyn Rogers emphasized that while Canada has historically maintained low mortgage arrears rates—even during the 2008 financial crisis—today’s economic conditions differ. The high rate of inflation in Canada, coupled with elevated household debt levels, increases financial risk among Canadian homeowners, especially for variable-rate mortgage (VRM) borrowers dealing with fluctuating monthly costs.

A recent analysis from the Canada Mortgage and Housing Corporation (CMHC) highlights rising challenges as mortgage arrears are expected to increase, particularly in Toronto and Vancouver. While homeowners have shown resilience in managing rising payments, the “mortgage renewal shock,” inflation, and higher interest rates will strain many households over the next 18 to 24 months. Over one million mortgages renewing in 2025 at higher rates, combined with a softening labour market and rising unemployment, are expected to push arrears higher, with Toronto potentially reaching levels unseen since 2012.

Key factors predicting arrears include weak resale housing markets and rising non-mortgage credit delinquencies, such as credit cards and auto loans. Cities like Calgary, Saskatoon, and Halifax are expected to remain stable, while Toronto and Vancouver face sharper increases due to high listings and limited buyer activity. Montreal, Ottawa, and Edmonton show mixed trends, with stable mortgage arrears but increasing non-mortgage credit issues.

Affordability Policies and Long-Term Financial Risks

In response to high home prices in Canada and affordability challenges, recent policy adjustments will allow some Canadian mortgage borrowers to extend their amortization periods from 25 to 30 years. This reduces monthly mortgage costs but can increase the total interest paid by $50,000 more over the loan’s life. While this provides short-term relief, it may negatively affect long-term financial stability for Canadian households.

According to Rogers, there’s “no free lunch” in the mortgage market, and policies aimed at affordability can compromise future financial health. Borrowers who stretch amortizations may face higher long-term costs, reduced savings, and less flexibility, limiting their ability to build home equity in Canada.

The Role of Mortgage Securitization and Fiscal Risks

Canada’s mortgage securitization market, including the Canada Mortgage Bonds (CMB) and National Housing Act Mortgage-Backed Securities (MBS), is vital in distributing financial risk. These securitizations provide Canadian mortgage lenders liquidity to reduce funding costs and potential vulnerabilities.

Rogers warned that a significant downturn in the Canadian housing market or an increase in defaults could impact the federal government, as it backs a large portion of mortgage insurance in Canada. This connection raises fiscal risks with potential implications for taxpayers. While the probability of this risk remains low, the complexity of the market necessitates caution.

International Perspectives on Mortgage Market Structure

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

Improving Canada’s housing affordability requires more than just mortgage policy changes. While central bank policies and mortgage regulations shape home prices by influencing credit availability, housing affordability issues stem mainly from an imbalance between housing supply and demand in Canada. Easing mortgage underwriting policies without addressing supply limitations may increase prices, countering efforts to improve access to affordable housing.

Rogers stressed the need to avoid “tinkering too much with the mortgage market,” emphasizing that solving housing affordability in Canada requires long-term planning and targeted solutions. Expanding housing supply in high-demand regions like Toronto and Vancouver can help ease affordability pressures while reducing risks associated with high household debt.

How Mortgage Brokers Can Help

Canada’s mortgage market remains resilient but faces several risks, from rising renewal rates and affordability challenges to the complexities of a securitized lending system. While recent policy adjustments aim to ease short-term mortgage affordability issues in Canada, the Bank of Canada cautions that these changes may have long-term impacts on borrowers, lenders, and the economy.

Navigating Canada’s mortgage market in such a volatile environment can be challenging for homeowners and investors. Understanding the potential impacts of policy changes, renewal payment shocks, rate fluctuations, and market rate forecasts is essential for creating a personalized mortgage strategy that meets your financial circumstances and goals.

If you’re considering a mortgage renewal or exploring options for your next purchase or refinance, contact nesto mortgage experts for personalized guidance. With consideration for Canada’s mortgage market risks and insights into navigating current market trends, our team can help you make valuable choices that align with your financial goals, ensuring long-term stability and affordability in an evolving economy.

Are you still deciding whether to go fixed or variable or waiting for rates to drop? Nesto’s Prime Time can help you save with a discounted mortgage payment now while waiting to lock in later. Contact nesto’s mortgage experts to help you choose the best mortgage for your unique needs.

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Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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