10 steps to take ahead of Bank of Canada interest rate change: How 1.2 million mortgage holders can prepare

Wave of mortgage renewals in 2025 and 2026: A statistical overview

With approximately 30% of all Canadian mortgages set to renew over the next two years, it’s crucial for homeowners to consider how current and near-term future economic decisions could impact their housing affordability calculations.

Keep in mind, these renewals are scheduled after a few years of rising interest rates — with mortgage rates climbing from historical lows of 0.25% in early 2020 to as high as 5% in 2023.

For context:

• The average fixed-rate mortgage in Canada reached 5.7% in 2023, up from around 2.5% in 2020.
• Meanwhile, variable rate morgages surged due to rapid increases in the Bank of Canada’s target rate, adding hundreds of dollars to monthly payments for many borrowers.
• Roughly 60% of mortgages set to renew in 2025 and 2026 are fixed-rate, meaning these homeowners locked in lower rates during earlier years but may face significant jumps upon renewal.

This statistical backdrop underscores the financial challenges Canadians are likely to face — but also highlights the potential for relief if the target rate is shifts downward.

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How changes to the BoC target rate can alleviate financial strain

The Bank of Canada’s target rate directly influences borrowing costs, including the prime rate used by banks to set mortgage interest rates. A reduction in the target rate would have a ripple effect, lowering interest rates on new and renewing mortgages alike. For homeowners, this could translate into:

Lowers monthly payments

A 1% decrease in mortgage rates could save the average borrower $150–$300 per month on a $500,000 mortgage.

For those renewing a fixed-rate mortgage, this reduction could soften the impact of transitioning from historically low pandemic-era rates to today’s elevated levels.

Greater predictability for variable-rate holders

Homeowners with variable-rate mortgages tied to the prime rate would experience immediate reductions in their monthly payments if the target rate decreases.

This relief could stabilize household budgets and help prevent financial overextension.

Improved refinancing options

A lower target rate could also enhance refinancing opportunities for struggling homeowners, enabling them to consolidate debt at more favorable terms.

For many Canadians, these outcomes would mean a reduced likelihood of defaulting on their mortgage and an improved capacity to manage other financial obligations.

10 steps homeowners can take to prepare for interest rate changes

1. Evaluate current financial position

• Assess monthly budgets and identify areas for savings to accommodate potential higher mortgage payments upon renewal.
• Build an emergency fund to handle unexpected financial strain.

2. Understand your mortgage terms

• Review your mortgage contract to know the renewal timeline and conditions.
• Determine whether your mortgage is fixed or variable and how interest rate changes will affect payments.

3. Explore renewal options early

• Contact your lender in advance of your renewal date to discuss options.
• Consider locking in a fixed rate if you prefer payment stability over potential market fluctuations.

4. Compare mortgage offers

• Shop around for competitive rates and terms.
• Utilize online mortgage calculators to estimate monthly payments and evaluate scenarios.

5. Consider pre-payment strategies

• Pay down as much of your principal as possible before renewal to reduce the impact of a higher interest rate.
• Make lump sum payments if permitted by your current mortgage terms.

6. Refinance or consolidate debt

• Look into refinancing options to secure lower rates or consolidate high-interest debts for better financial management.

7. Seek professional advice

• Consult a mortgage broker or financial advisor to explore strategies tailored to your situation.
• Stay informed about economic trends and Bank of Canada announcements.

8. Prepare for variable rate adjustments

• If holding a variable-rate mortgage, prepare for fluctuating monthly payments.
• Set aside additional funds to cushion potential increases.

9. Monitor economic indicators

• Stay updated on changes to the Bank of Canada’s target interest rate and other relevant economic policies.

10. Leverage financial tools

• Use budgeting apps and tools to track expenses and manage financial changes efficiently.
• Access resources such as calculators and guides to simulate future scenarios.

By taking proactive steps and staying informed, homeowners can mitigate the financial impact of interest rate changes and ensure better control over their mortgage commitments in 2025.

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Relationship between mortgage rates and loan delinquency

Delinquency rates — defined as loans overdue by 90 days or more — are a critical indicator of financial strain within the housing market.

Canada’s mortgage delinquency rate has historically been low, sitting at just 0.15% in 2023, but the rapid rise in interest rates has raised concerns about a potential increase in mortgage loan delinquencies.

Here are some key factors to consider:

Impact of rate decreases on delinquency rates

If the Bank of Canada drops its target rate, homeowners renewing their mortgages may find themselves in a more manageable financial position, reducing the likelihood of missed payments. Lower rates could also enable at-risk borrowers to restructure their debts, preventing delinquencies.

Historical trends

During previous periods of declining rates, delinquency rates either stabilized or fell, as borrowers faced less financial pressure. A similar trend could emerge if rates are reduced for 2025 and 2026.

Potential risks and challenges

While a lower target rate could provide relief, it is not without potential drawbacks. The following considerations highlight why policymakers and borrowers must approach this issue with care:

Housing market dynamics

A significant rate reduction could reignite demand in the housing market, potentially driving home prices higher. For first-time buyers or those seeking to upsize, this could erode affordability gains made during periods of slower market activity.

Inflationary pressures

Lowering rates too quickly or significantly could stoke inflation, complicating the Bank of Canada’s efforts to maintain price stability. This may limit the extent to which rates can be reduced without adverse economic consequences.

Long-term debt sustainability

A reduction in rates could encourage higher levels of household borrowing, potentially exacerbating Canada’s already high household debt-to-income ratio, which stood at 183.3% in 2023.

Economic uncertainty

If global or domestic economic shocks occur, rate adjustments may have less predictable effects on the housing market and mortgage renewals.

Broader implications for the Canadian economy

The relationship between mortgage rates and financial stability extends beyond individual households. Reduced financial strain on borrowers could yield significant benefits for the Canadian economy, including:

Increased Consumer Spending: Homeowners with lower monthly payments are more likely to spend on goods and services, boosting economic activity.

Stabilized Housing Market: Lower rates could encourage greater stability in home sales and prices, mitigating the risk of sharp market corrections.

Banking Sector Healt: A reduction in mortgage delinquencies would strengthen the financial health of Canadian banks, reducing risks in the lending system.

Economic Growth: By alleviating financial strain on households, a lower target rate could create conditions for more sustainable economic growth.

Bottom line: December 2024 is a critical moment for Canadian homeowners

The upcoming wave of mortgage renewals in 2025 and 2026 will serve as a litmus test for the resilience of Canadian households and the effectiveness of monetary policy. With 1.2 million mortgages set to renew, even modest changes in the Bank of Canada’s target rate could have profound effects on financial stability and delinquency rates.

While a rate reduction could alleviate significant financial pressure and reduce delinquencies, it is not without risks. Policymakers must carefully balance the benefits of lower borrowing costs with the need to maintain economic stability and control inflation.

For Canadians facing mortgage renewals, proactive financial planning and an awareness of market trends is very important. With careful policymaking and informed decision-making by borrowers, the potential exists to turn this period of uncertainty into an opportunity for greater financial stability.