Over the next two years, the Bank of Canada (BoC) has predicted that a wave of mortgage renewals, increasingly referred to as the "mortgage renewal wall" — constituting over four million mortgages — are expected to renew in an environment defined by significantly higher interest rates.
The Canadian Mortgage and Housing Corporation (CMHC) has predicted that 85% of the 1.2 million mortgages up for renewal in 2025 alone will face a higher interest rate than the roughly 1% rate they enjoyed when locking in.
At stake is the financial stability of homeowners across the country, a reduction in consumer spending that could stymie the economic progress made by the BoC, and losses for lenders, mortgage insurers, and investors, further jeopardizing the wider economy.
But a consensus on just how serious the 'wall's' impact will be has yet to be reached. To get a better idea of what we can expect to see in the coming years, STOREYS spoke to Director, Senior Economist at Bank of Montreal (BMO) Robert Kavcic.
Kavcic, who has been with BMO since 2006, says we shouldn't disregard the coming wave of renewals but likens the 'wall' to more of a "modest headwind."
Robert Kavcic, Director, Senior Economist at Bank of Montreal (BMO)Robert Kavcic
“I wouldn’t disregard it, I would say it’s kind of like a modest headwind, so to speak. It's going to be there, and we’re going to have to work through it, but it's not going to be something that’s going to debilitate most households or the economy," he says.
Kavcic's mild forecast is based on a number of factors, the most significant being that Canada's mortgage requirements, namely stress tests, have provided a sort of security blanket for homeowners.
"When somebody walked into the bank in 2021 and took out a mortgage at 1.5%, they were stress tested in most cases at around 5.25%," says Kavcic. "So they would have already proven an ability to handle mortgage rates that are probably going to be higher than we actually see at renewal anyway, the way rates are going right now."
What this means is that we won't see a wave of delinquencies and forced selling as 1.2 million Canadians renew their mortgage this upcoming year, at least not as many as were predicted before rates began to fall this summer.
Along that same vein, the falling interest rate will also mitigate the effects felt by renewers over the next two years. "A lot of people were concerned a year and a half ago when mortgage rates were up at like 6% or 7%," says Kavcic. "That was going to be a pretty big chunk for a lot of households to absorb, but most mortgages rates are already back down around 4% and are possibly going to be even lower through 2025, which should take some of the sting out of it."
As well, Kavcic says it's likely banks will be willing to work with clients to stretch out amortization at renewal, taking a chunk of their monthly payment increase off the table.
The other factor that will provide some relief to homeowners is the fact that many of them are simply making more money now than they were when they locked in. "You have a lot of people who took a lower rate mortgage and after five years they have five years of income growth to help absorb [a monthly payment increase]," Kavcic explains.
Of course, home-owning Canadians constitute a wide spectrum of income levels and ownership types, and not all will be impacted equally. Kavcic estimates that people will pay around 20% to 50% more in monthly mortgage payments after renewal, which, for the average middle-class Canadian will likely mean more discretionary spending. "It’s not like they're going to foreclose on their house or go delinquent on their mortgage, but maybe it’s one less vacation or a couple less restaurant meals," he says.
For younger families or those with lower incomes, the increase will likely "hurt a little bit," as Kavcic puts it. Whereas, a wealthy family with built-up assets on the side will more or less go unscathed. So, while most mortgages will survive higher rates, the consensus is that spending will decrease to some extent, slowing the wider Canadian economy — though likely only for a relatively short period.
"Discretionary spending will be held back a bit, and that’s where that headwind would come from," says Kavcic. "But there’s probably going to be less of that through 2026. By the time we get to 2027, 2028, and beyond, that’s when this whole renewal wave plays itself out."
But while the average homeowner will get by making more and spending less, investors will take the brunt of the so-called headwind. The large number of investors who bought properties in 2021 or early-2022 with the intention to flip them or simply rent them out, will now face conditions where those investments just don't pencil.
"Maybe the arithmetic made sense when they were borrowing at 1.5%, but turns out on closing you’re actually borrowing at 4%, so it doesn't work anymore," says Kavcic. "Those are the ones that will probably take a loss and have to flip some of that onto the resale market."
