How to Renew Your Mortgage in 2025

Introduction

As we head into 2025, renewing your mortgage might feel like a daunting task, especially with significant changes brewing in the Canadian mortgage market. It’s a massive year for mortgage renewals, with over $300 billion in mortgages set to come up for renewal. The five-year mortgage term—a popular choice among Canadians—will be front and centre, as many who locked in rates back in 2020 face substantially higher rates now. Canadians overwhelmingly prefer fixed mortgage rates over variable mortgage rates, with 70% holding a fixed-rate mortgage at the start of 2024. Here’s what you need to know to prepare for renewing your mortgage in 2025.

Why is 2025 Such a Significant Year for Mortgage Renewals?

Approximately 1.2 million mortgages are coming up for renewal in 2025, with 85% of mortgage-holders expected to face higher mortgage rates than what they originally signed up for when they initially contracted their mortgages. 

The Bank of Canada’s trendsetting target for the overnight rate (sometimes known as the policy rate), which directly impacts variable mortgage rates, has fluctuated significantly in recent years, soaring upwards through 2022 and 2023 in the wake of 10 rate hikes by the Bank of Canada implemented to stem runaway inflation (taking the policy rate from 0.25% to 5.00%), followed by a series of rate cuts beginning in June 2024 in response to falling inflation and a slowing economy (bringing the policy rate down to 3.75% as of publication time). While variable rates will continue to ease with anticipated rate cuts from the Bank of Canada, bond yields remain volatile. Unlike variable mortgage rates, fixed mortgage rates are directly tied to the bond market rather than the Bank of Canada’s rate decisions. However, the same inflation that provoked the Bank of Canada’s rate-hiking cycle also sent bond yields soaring. As well, various economic reports from Canada, the United States and abroad have also caused volatility in the bond market, as anxious investors react swiftly to any sign of economic instability. Bond yields have consequently risen and fallen like a rollercoaster, but remain well above where they were in 2020. So even if the overnight rate drops, fixed-rate borrowers will almost certainly still see higher costs compared to 2020.

How Much More Will Your Mortgage Payments Be? 

In 2020, the best five-year fixed mortgage rates were around 1.50%, while variable mortgage rates hovered near 1.25%. Fast forward to 2025, and mortgage rates could be significantly higher. Even with further potential cuts from the Bank of Canada, five-year fixed mortgage rates might sit closer to 4.50%, and variable rates could be in the 4.00% range. These changes translate to higher monthly payments for most borrowers.

Let’s break it down:

• Fixed-rate borrowers: If you’re renewing your mortgage, your payments will increase by hundreds of dollars each month compared to what you locked in during 2020. If you purchased a home for $400,000 with a 20% down payment ($80,000) at a fixed mortgage rate of 1.50% in 2020 with an amortization period of 25 years, your monthly mortgage payments would be $1,279. Now, let’s say you purchased the same $400,000 home in 2025 at a fixed mortgage rate of 4.50%, keeping your down payment and amortization period the same. Your monthly mortgage payment would become $1,771, a difference of $492 per month. 

• Variable-rate borrowers: While these rates move in line with the Bank of Canada’s policy rate decisions, the overall impact will still mean higher payments compared to what your mortgage cost in 2020. Let’s take the previous example: If you purchased a $400,000 home in 2020 at a variable rate of 1.25% with a 20% down payment ($80,000) and a 25-year amortization period (meaning that you would have 25 years to pay off your entire mortgage), your monthly mortgage payment would have been $1,242. Meanwhile, if you were to make the same purchase in 2025 (assuming home price, down payment and amortization period are the same) at a rate of 4%, your monthly mortgage payment would be $1,683, a difference of  $441 per month. 

As we move into 2025, variable rates will likely continue to ease due to additional predicted rate cuts from the Bank of Canada. But even then, homeowners will need to prepare for a significant adjustment in their budgets. If the Bank of Canada continues to cut rates as predicted, the big banks are forecasting that our central bank’s overnight lending rate could end up somewhere between 2.00% and 3.00% by Q⁴ of 2025. If you have a variable-rate mortgage, that would more than likely mean a variable mortgage rate starting with 3%, more than double the typical variable rate of 1.25% that you could have contracted back in 2020.

What Can You Do to Handle the Impact of Renewing at a Higher Rate?

Renewing at a higher rate doesn’t have to be overwhelming if you take the right steps. Here are some strategies to soften the blow:

1. Start Early: Wondering, “How early can you renew your mortgage?” The answer depends on your lender, but most allow you to begin the process as early as 120 to 180 days before your term ends. Starting as early as possible gives you time to explore options and lock in a favourable rate.

2. Shop Around: Your current lender might not offer the best deal, so it’s worth checking with a mortgage broker to compare rates and terms. Mortgage brokers have access to a range of mortgage products from multiple lenders and often receive volume discounts from major lenders. This allows them to be able to find rates even lower than what you could get on your own. Since brokers are paid by the lender when a contract gets signed, their services are free to you. Because they don’t work for any specific lender, mortgage brokers can give you expert, unbiased advice. Switching lenders could save you thousands over the life of your mortgage, and you have nothing to lose from speaking with a mortgage broker.

3. Consider a Short-Term Fixed Rate: With rates expected to drop further in the coming years, a short-term fixed-rate mortgage could be a smart move. Locking in for less than the typical five-year term gives you the flexibility to renew when rates are lower, without committing to today’s higher costs. This is especially good for those who don’t have the appetite for risk to get a variable-rate mortgage.

4. Look at Variable Rates: Variable-rate mortgages are directly affected by the Bank of Canada’s rate decisions, and are therefore certain to  trend downward as the Bank of Canada continues its rate cuts through the end of 2024 and into 2025. These mortgages typically come with the option to switch to a fixed rate later without any penalty, giving you some flexibility if market conditions change.

5. Extend Your Amortization Period: If higher payments feel unmanageable, you could potentially extend your mortgage’s amortization period (i.e. the length of time you have to pay off your entire mortgage). While this increases the overall interest you’ll pay in the long run, it’s a temporary solution to reduce monthly costs.

Preparing for the Renewal Process

Renewing your mortgage is about more than just picking a rate. It’s an opportunity to reassess your financial goals. Consider factors like:

• Your risk tolerance: Are you comfortable with a variable rate, or do you prefer the predictability of fixed payments?

• Your long-term plans: If you plan to move or sell soon, a shorter term might make more sense.

• Your overall budget: Make sure your new payments fit comfortably within your financial limits.

The Bottom Line

Mortgage renewals in 2025 come with their challenges, but being proactive can make a world of difference. Rates will certainly remain higher than what borrowers locked in five years ago, but with the Bank of Canada expected to continue cutting rates in 2025, there’s hope on the horizon.

Start the renewal process early, explore your options and consider strategies like getting a shorter-term fixed-rate mortgage or a variable-rate mortgage to ease the transition. By taking your time and considering your options, you’ll be better equipped to handle the higher costs and find a solution that works for you. Connect with a mortgage broker today to get expert advice tailored to your situation.