10 Steps to take with the Bank of Canada’s interest rate change: How 1.2 million mortgage holders can prepare.

Canada faces a key time for mortgage renewals in 2025 and 2026. Homeowners and financial experts are watching interest rates for any signs of relief. Recently, the Bank of Canada (BoC) offered some hope. It cut rates by 0.25%. This is great news for those with variable-rate mortgages and first-time buyers.

The BoC’s rate cut, announced on January 29, 2025, brought the central bank’s overnight rate down to 3.00%. This cut lowered the prime rate on variable loans to 5.20%. This change may help homeowners who need to renew their mortgages soon.

Timing for this rate cut is key. CMHC estimates that 1.2 million mortgages will renew in 2025 and 2026. This information comes from its Fall 2024 Residential Mortgage Industry Report. This wave of renewals comes after years of rising interest rates. Mortgage rates jumped from historic lows in 2020 to between 5.00% and 9.00% in 2023 and 2024.

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The new rate cut will help borrowers with variable-rate mortgages. They will notice lower monthly payments immediately. Also, those renewing fixed-rate mortgages might find better lending conditions than they expect. Uncertainty still exists. Future rate changes depend on inflation, economic stability, and global financial conditions.

This guide lists 10 key steps for homeowners. It helps them get ready for mortgage renewals and possible rate changes. If you’re renewing a mortgage, refinancing, or thinking about prepayment, stay informed. Being proactive can lessen financial strain. It can also help you afford more as interest rates change.

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Wave of mortgage renewals in 2025 and 2026: a statistical overview.

About 30% of Canadian mortgages will renew in the next two years. Homeowners should consider how today’s and tomorrow’s economic choices could impact their housing costs.

Lenders planned these renewals after years of rising interest rates. Mortgage rates.

For context:

• The average fixed-rate mortgage in Canada reached 5.7% in 2023, up from around 2.5% in 2020.
• In December 2024, Canada’s Big 5 banks offered an average 5-year variable mortgage rate of about 4.83%.
• In January 2025, the best high-ratio 5-year variable rate in Canada had decreased to 4.45%.
• Variable rate mortgages rose sharply as the Bank of Canada’s target rate increased. This change added hundreds of dollars to monthly payments for many borrowers.
• About 60% of homeowners renewing their mortgages in 2025 and 2026 got lower fixed rates in the past. Yet, they might see big increases when it’s time to renew.

This data shows the financial challenges Canadians may face. It also points to possible relief if the target rate drops this year.

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How changes to the BoC target rate can reduce financial strain.

The Bank of Canada’s target rate affects borrowing costs. This includes the prime rate, which banks use to set mortgage interest rates. Lowering the target rate would cause a ripple effect. It would reduce interest rates for both new and renewing mortgages. For homeowners, this could translate into:

Lowers monthly payments.

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

This cut might help those renewing a fixed-rate mortgage. It could ease the jump from low pandemic rates to today’s higher rates.

Greater predictability for variable-rate holders.

Homeowners with variable-rate mortgages tied to the prime rate will notice lower monthly payments immediately if the target rate drops.

This relief could stabilize household budgets and help prevent financial over-extension.

Improved refinancing options

A lower target rate can boost refinancing chances for homeowners in need. This helps them combine their debt on better terms.

For many Canadians, this means they are less likely to default on their mortgage. It also helps them manage other financial responsibilities better.

• Learn More: Are you buying your first home, renewing your mortgage, buying a car, or paying off debt? Check how the recent Bank of Canada rate cut impacts you.

10 Steps homeowners can take to prepare for interest rate changes.

1. Check the current financial position.

• Check monthly budgets and find ways to save. This will help cover possible higher mortgage payments when it’s time to renew.
• 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 if your mortgage has a fixed or variable rate. Then, see how interest rate changes will impact your payments.

3. Explore renewal options early.

• Contact your lender in advance of your renewal date to discuss options.
• Lock in a fixed rate if you want stable payments. This helps avoid market ups and downs.

4. Compare mortgage offers.

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

5. Consider prepayment strategies.

• Pay off as much of your principal as you can before renewal. This helps lessen the effect of a higher interest rate.
• Make lump-sum payments if permitted by your current mortgage terms.

6. Refinance or merge debt.

• Explore refinancing options. This can help you get lower rates. You can also combine high-interest debts for easier financial management.

7. Seek professional advice.

• Talk to a mortgage broker or financial advisor. They can help you find strategies that fit your needs.
• Stay informed about economic trends and Bank of Canada announcements.

8. Prepare for variable-rate adjustments

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

9. Track economic indicators.

• Keep up with updates on the Bank of Canada’s target interest rate and key economic policies.

10. Leverage financial tools.

• Track expenses and manage your money with budgeting apps and tools. They help you see financial changes without confusion.
• Access resources such as calculators and guides to simulate future scenarios.

Homeowners can lessen the financial impact of interest rate changes in 2025. They should take action and stay informed. This helps them to better manage their mortgage commitments.

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Relationship between mortgage rates and loan delinquency.

Delinquency rates show how many loans are overdue by 90 days or more. They are a key sign of financial stress in the housing market.

Canada’s mortgage delinquency rate has been low, at 0.15% in 2023. The recent rise in interest rates has raised concerns about more mortgage delinquencies.

• Read More: What is the difference between the overnight rate and the prime rate? Learn how the BoC target rate impacts lending rates — and how this can help you get out of debt faster.

Here are some key factors to consider:

Impact of rate decreases on delinquency rates

If the Bank of Canada cuts its rates, this change could help prevent missed payments. Lower rates could also enable at-risk borrowers to restructure their debts, preventing delinquencies.

Historical trends

In past times of falling rates, delinquency rates either stayed the same or dropped. This happened because borrowers felt less financial strain. If they reduce rates for 2025 and 2026, a similar trend could emerge.

Potential risks and challenges

While a lower target rate could provide relief, it is not without potential drawbacks. Here are key points for policymakers and borrowers to consider:

Housing market dynamics

A big rate cut could boost demand in the housing market. This might cause home prices to rise. For first-time buyers or those looking to upgrade, this could reduce affordability gains. The market is moving slower now.

Inflationary pressures

Lowering rates could raise inflation a lot. This would make it harder for the Bank of Canada to keep prices stable. This might limit our ability to lower rates without hurting the economy.

Long-term debt sustainability

Lower rates could lead to more household borrowing. This might worsen Canada’s high household debt-to-income ratio, which is 183.3% in 2023.

Economic uncertainty

Economic shocks, whether global or domestic, can make rate adjustments unpredictable. This uncertainty may impact the housing market and mortgage renewals.

Broader implications for the Canadian economy

The relationship between mortgage rates and financial stability extends beyond individual households. Reducing financial stress for borrowers can bring many benefits to the Canadian economy. Here are some benefits:

Homeowners with lower monthly payments spend more. They buy more goods and services. This helps to boost the economy.

Stabilized housing market: Lower rates can help make home sales and prices steady. This may reduce the chance of sudden market drops.

Banking health: Fewer mortgage delinquencies would improve Canadian banks’ financial health. This change would lessen risks in the lending system.

Lowering the target rate can ease financial pressure on households. This change may lead to steadier economic growth.

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Bottom line: January 2025 is a critical moment for Canadian homeowners.

The mortgage renewals in 2025 and 2026 will test how strong Canadian households are. They will also show how well monetary policy works. About 1.2 million mortgages are up for renewal soon. Small changes in the Bank of Canada’s target rate can impact financial stability. They can also lead to higher delinquency rates.

A rate cut can reduce financial stress and lower delinquencies. But it has risks too. Policymakers need to balance lower borrowing costs with economic stability. They must also keep inflation under control.

Canadians renewing their mortgages need smart financial planning. Understanding market trends is also important. Smart policies and good choices can help borrowers find financial stability during tough times.

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