Canada’s central bank is just realizing the mortgage rate renewal cliff is much smaller than thought. The Bank of Canada’s (BoC) Financial Stability Report (FSR) shows the average mortgage payment will rise much less than anticipated on renewal. Economists from BMO Capital Markets told investors the improvements are mostly already reflected in the market. Those expecting much further easing in the coming months are likely to be disappointed—unless the trade war picks up. In that case, there would be a totally different set of headwinds for households to brace for.
Canadian Mortgage Rate Renewal Cliff Much Smaller Than Forecast
Source: Bank of Canada.
Canada’s central bank has repeatedly expressed concerns over a rate renewal cliff. Following a borrowing spree fueled by record low rates, borrowers would have to renew at much higher rates. While the majority of borrowers were stress tested for this exact event, the central bank still expressed fears. The average mortgage payment was forecast to rise 15% in 2024—manageable for most, but still enough to throttle consumer cash flow.
The BoC’s Financial Stability Report (FSR) shows reality has been much kinder to borrowers. “In this year’s Financial Stability Report, the Bank highlighted that the pressure will remain through 2026-but crucially, it could be lower than anticipated last year thanks to downward adjustments to expected interest rates,” explained Shelly Kaushik, senior economist at BMO
She points to the FSR projections vs reality, which show the average mortgage payment climbed 4 points less than forecast. Similarly, the BoC’s updated outlook sees payment growth roughly 5 points lower than previously forecast. Mortgage payments going from record low rates to a less than 5% increase on renewal in 2026 is shockingly low risk.
Canadian Mortgage Rates Won’t Get Much Lower Without A Crisis
Those hoping for a return to record-low rates to fuel another frenzy will be disappointed. Following another crisis-speed easing cycle, rates reflect most of the market slack. That is, unless another crisis stacks on top of this recession.
“At this point, the improvement has mostly run its course, as our forecast has just three more rate cuts pencilled in for this year. Of course, rates could go even lower—but that will likely only happen if there is a more meaningful hit to the outlook (and, thus, the labour market) from the trade war,” says Kaushik.
Unlike the temporarily induced recession during the pandemic, the trade war recession isn’t expected to boost home buying. The low rates during this cycle would accompany structural unemployment, similar to the harshest recessions. Those problems won’t be as easily fixed with access to cheap credit.