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As falling home prices leave more Canadians underwater on their mortgages, experts explain the refinancing and renewal options available.
The Canadian property market has experienced a major contraction since the end of the pandemic, reversing rapid house price gains between 2020 and 2022. According to the MLS House Price Index, the cost of property fell by 20% from its peak in early 2022, as well as by 4.7% year-on-year.
There’s unlikely to be respite any time soon, either. The cost of property fell by 0.4% month-on-month in March, and TD Economics predicted house prices dropping by a further 0.3% this year.
If you bought at the top of the market, you may currently have negative equity in your home—known as being “underwater.” This happens when your loan ends up being higher than the value of your property.
While investors typically put at least 20% down on a property, many first-time buyers purchase properties with a down payment as low as 5–10%, meaning it doesn’t take much of a property price drop to put them in negative equity.
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Marnie Golen, a mortgage agent at Pineapple Financial in Toronto, reported that 87% of her current business is dealing with people who are refinancing. In contrast, back in 2021, 90% of her business was helping people buy property with a mortgage.
This spike in people falling into negative equity is something that’s disproportionately impacting major economic centres. Toronto condos prices, for example, have fallen by a staggering 25% since 2022.
Mortgage broker Raja Paul named Pickering, Ajax, Oshawa, Brampton, Vancouver, and Calgary as just some of the most-affected areas. They experienced substantial housing price growth during the COVID-19 pandemic, followed by deep falls.
“Out of 20 deals on my desk in April, about nine of them had a negative equity issue,” he said.
Paul blamed the pullback on a large number of investors purchasing condos in prime areas, despite limited appetite to rent these expensive homes in a time where remote working is becoming more popular. He predicted buyer demand for condos returning only when renting them becomes more expensive monthly than buying with a mortgage.
If you’re underwater with your home mortgage, you can look at a product transfer, pay down your mortgage and switch lenders, consider getting an insured mortgage, or speak to smaller or alternative lenders to find better terms. Let’s dive into each of these a bit.
This is the option most recommended to people with negative equity.
Provided you’re happy to remain on similar terms and don’t want to borrow money, most major lenders will allow you to take out a “product transfer” once your term ends. This puts you on a new fixed or discounted term instead of moving onto your lender’s more expensive standard or prime rate after your fixed term expires.
The caveat? You must stay with the same mortgage provider. It’s why people with negative equity are commonly referred to as being “mortgage prisoners,” since they’re forced to remain with the same bank or lending institution.
While product transfers are offered as standard by Canada’s leading lenders, it’s not a guarantee if you’re with a B or alternative lender.
The challenge with rising mortgage rates
The Bank of Canada interest rate rose from 0.25% in February 2022 to 5% by July 2023, which shocked some homeowners when their mortgages came up for renewal. While the interest rate has since come down to 2.25%, mortgages are costing a lot more than they used to. The average 5-year fixed rate mortgage currently stands at 6.09%, up from 4.79% in 2021.
If you have sufficient equity, you can lower your monthly payments by extending the amortization period from 25 years to 30, or sometimes even 35. If you take out a product transfer, however, you are generally stuck with the same amortization period.
If you want to switch lenders, one option is paying down your mortgage before refinancing to reach an equity level of 20%, the amount commonly required for an uninsured mortgage.
If you own other properties, you might be able to refinance one or more of them to free up cash. If you’re cash strapped, options may include borrowing money from parents or relatives, or consolidating debt into an unsecured line of credit (though with higher interest rates, this is typically not a great choice).
Raising money to switch lenders can make sense if you want to extend the amortization period to lower your monthly payments, or if you’re extremely unhappy with your current lender.
Related reading: Refinancing your mortgage? Get a home appraisal first
While first-time buyers often buy with a smaller down payment, they’re less likely to be immediately impacted by falling into negative equity since they have mortgage default insurance. If you’ve put less than 20% down, this coverage protects lenders if you stop making your monthly payments.
New lenders are generally more open to taking over a mortgage at renewal even if the home is underwater since they’re protected by the original terms of the insurance. The downside is that you can’t change the amortization period.
Smaller lending institutions are commonly more flexible in their terms, which means that some are willing to accept a mortgage holder with less equity.
For example some private lenders are prepared to lend up to 85% LTV, rather than the standard 80% LTV, though they tend to have less favourable rates and fees.
Some alternative lenders are also more lenient in terms of the amortization period, which can make monthly payments cheaper as they are spread across a 35-year period. The tradeoff is that interest rates tend to be higher than with mainstream lenders.
While many mortgage holders in Canada wait until the last minute to consider renewal options, it’s a good idea to start preparing about six months in advance.
Mortgage brokers can talk you through your options and can hold a mortgage rate for 120 days, which is especially helpful in volatile times. In some cases, it may even make sense to pay off your existing mortgage early to make the switch.
Whether your equity is in good shape or underwater, it pays to plan ahead so there are no unwelcome surprises when you renew your mortgage terms.
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