Mortgage rates have been changing rapidly in Canada throughout 2025, influenced by the Bank of Canada's interest rate decisions, economic conditions such as the uncertainty brought on by US tariffs, and inflation. If you're renewing your mortgage soon or considering refinancing, it’s essential to understand how these factors could impact you.
What's Happening with Mortgage Rates?
The Bank of Canada has recently lowered its policy rate, causing prime and variable mortgage rates to fall. Fixed-rate mortgages are priced based on bond yields and what investors will pay for them. Fixed rates have steadily dropped after several years of high interest rates. Variable rates have been more unpredictable, influenced by the Bank of Canada policy rate changes, directly affecting mortgage lenders’ prime rates.
Canadian mortgage lenders, including Big Banks such as RBC, TD, BMO, Scotiabank, CIBC, National Bank, and Desjardins, have more recently reduced their discounts on mortgage rate pricing due to tariff uncertainty and recession risks. High-ratio mortgage rates have now gone below the 4% range, while most 5-year fixed rates on conventional mortgages are around the mid-4% range, and variable rates are slightly lower.
How Interest Rate Changes Affect You
Buying or owning a home becomes more expensive when mortgage rates go up. Higher interest rates mean higher monthly payments, reducing what one can comfortably afford. Conversely, when rates are low, monthly mortgage payments become cheaper, sometimes driving up home prices, as more Canadians can afford higher mortgage payments.
The Bank of Canada’s decisions are key because they set the prime rate banks use to determine variable mortgage rates in Canada. As the BoC raises interest rates to control inflation and stabilize the economy, your mortgage payments can increase, especially if you have an adjustable-rate mortgage (ARM). While monthly payments on a variable-rate mortgage (VRM) remain unchanged, the proportion that goes to interest and principal fluctuates with interest rate changes.
Choosing the Right Mortgage in 2025
With mortgage rates rising, picking the mortgage that best matches your financial circumstances and risk appetite is critical:
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Fixed vs Variable Mortgages: Fixed and variable mortgages have predictable payments that won’t change during the mortgage term, making them great if you prefer certainty. Although variable and fixed mortgage rates are similar currently, variable mortgages typically start at lower rates, so you benefit from a lower cost of borrowing. Still, variable-rate mortgages (VRM) can fluctuate, potentially costing more if you experience negative amortization if rates rise significantly over your mortgage term.
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Adjustable-rate mortgages (ARM): ARMs are like variable mortgages, but payments adjust periodically with the prime rate. Your payments will fluctuate as rates change, but you won’t be at risk of negative amortization.
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Mortgage Pre-Approval: Getting a pre-approved mortgage can lock in a rate or discount for a certain period, helping you avoid paying more or being unable to qualify if rates increase before you finalize your mortgage.
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Managing Renewal Payment Shock: If your current mortgage was locked in at very low rates, renewing at today’s higher rates could significantly increase your payments. Exploring refinancing or other mortgage options can help keep payments manageable, especially if you need to reassess your amortization.
Understanding Other Mortgage Options
Apart from fixed, variable, and adjustable mortgages, you might also encounter:
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Open vs Closed Mortgages: Open mortgages let you pay extra or pay off your mortgage early without penalties. Closed mortgages have lower interest rates but limit extra payments to 10, 15 or 20% of your original mortgage balance when you set up your mortgage with your lender.
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Short-term vs Long-term Mortgages: Typically, shorter terms (1-2 years) have lower mortgage rates but offer less stability. Longer terms (5-10 years) have higher mortgage rates but provide payment certainty. However, due to impending uncertainty in the Canadian economy due to US tariffs, shorter-term mortgage rates are higher than longer-term mortgage rates as the bond market sees the current risks abating in the future.
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Hybrid Mortgages: Collateral charge mortgage registrations allow you to combine home equity lines of credit (HELOC), fixed and variable mortgage rates and balance risk and potential savings.
A blended mortgage lets you take advantage of lower interest rates or access home equity without fully refinancing or paying prepayment penalties. It combines your current mortgage rate with a new, lower rate, creating a blended rate that helps reduce interest costs while keeping your mortgage contract intact.
There are a few ways to do this. Blend and extend lowers your rate and extends your mortgage term. Blend to term applies a lower rate for the rest of your current mortgage term without extending it. Blend and increase lets you borrow more by adding to your mortgage balance at a blended rate, with or without extending your mortgage term. This is a flexible way to save money or access home equity without the cost and hassle of breaking your mortgage.
What Are My Options if My Lender Won’t Renew My Mortgage?
Mortgage delinquencies are rising, creating a serious risk for homeowners—especially when renewing their mortgage. If you've missed payments or your credit has taken a hit, your lender may choose not to renew your mortgage at maturity. This could leave you with limited and more expensive options. Credit recovery takes time, and many borrowers don’t improve their scores quickly enough to secure better terms and conditions.
While rare, a lender can refuse to renew your mortgage if they perceive you as an increased lending risk. This could be due to missed payments, a poor credit score, or high debt levels. If your federally regulated lender is not allowing you to renew your mortgage, they must notify you at least 21 days before your current mortgage term ends.
If you find yourself in this situation, there are several possible solutions to explore, including finding a co-signer or guarantor, improving your credit score, increasing your income, consolidating debts, refinancing, moving to subprime lending or as a last resort, selling or downsizing.
Canadian Real Estate Market Trends
In Ontario, home prices have remained relatively stable into early 2025, with the average price increasing slightly year-over-year. Cities like Toronto have seen renewed sales activity driven by more listings and modest price growth. Ottawa continues to offer balanced market conditions, supported by steady demand. Hamilton and London have experienced sustained interest from buyers seeking more affordable options compared to the Greater Toronto Area, with home values showing minor gains or stabilization.
Nationally, the Canadian housing market is showing signs of recovery, with gradual price increases expected through 2025. Despite modest growth, affordability remains a concern, particularly for first-time buyers. In Quebec, market conditions are balanced overall, while Montréal continues to see consistent demand and price appreciation, especially in single-family homes and townhouses.
Limited inventory and ongoing demand in Western Canada have maintained price pressure in Vancouver, although affordability challenges persist. Calgary and Edmonton benefit from relative affordability and local economic strength, drawing increased buyer interest. Winnipeg maintains a steady market with moderate price changes, supported by balanced supply and demand.
Recent Mortgage Rule Changes and Income Requirements
Several essential changes now affect how you qualify for a mortgage in Canada:
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Insured Mortgage Limit Increase: The government increased the insured mortgage limit from $1 million to $1.5 million, allowing you to buy homes up to this value with as little as a 5% down payment. This change makes higher-priced homes more accessible for Ontario buyers.
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Stress Test Removed for Mortgage Transfers: If you're renewing your mortgage and switching lenders without changing your loan amount or amortization period, you no longer need to pass the mortgage stress test. This allows you to switch or transfer your mortgage to a new lender more easily if you find a better rate.
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Income Requirements for Mortgages: To qualify for a mortgage, lenders evaluate your income using two key metrics: Gross Debt Service (GDS) and Total Debt Service (TDS). Typically, your GDS ratio (housing costs as a percentage of your income) should be under 39%, and your TDS ratio (total debt payments as a percentage of your income) should be under 44%. For instance, to qualify and be stress-tested for a $400,000 mortgage on nesto’s low rates, you'll likely need a combined household income between $87,300 and $110,400. However, your actual monthly payment at nesto would range between $1,882 and $2,224 based on your solution and loan-to-value (LTV) ratio.
Where Are Mortgage Rates Headed?
According to mortgage rate forecasts, interest rates might ease in 2025 if the Bank of Canada lowers its policy rate. The policy rate currently sits near the upper end of the neutral range (2.25% - 3.25%), and cautious rate reductions are expected throughout the year, potentially bringing the rate down to around 2.50% by the end of 2025.
These expected lower mortgage rate trends could offer homeowners renewing later in 2025 more favourable borrowing conditions. However, mortgage rates could increase due to ongoing tariff risks, or home prices could rise again, potentially balancing out the benefits of rate cuts. With ongoing economic uncertainty, it’s best to lock in your rate or discount sooner, as over 200,000 mortgages across Canada are expected to mature in June.
Economic conditions and Bank of Canada policies constantly impact mortgage rates and housing markets. Whether you are renewing or refinancing your mortgage or exploring financing options for your new home purchase, understanding these changes can help you save money and make better choices.
Ready to compare mortgage rates for your renewal or refinance? Contact nesto mortgage experts today for personalized advice on your unique financial situation.