The two-part challenge for people renewing mortgages in 2025 – higher mortgage rates and lower home values

Veteran mortgage broker Tuli Parubets likes to send her clients e-mails showing how their home is rising in value.

This year, she’s taking a break. “I have not been sending them out because I don’t want to scare people,” she said.

It’s been widely reported that roughly 1.2 million people will renew mortgages this year at rates that will be much higher for the most part. Less understood is the fact that these renewers bought around the time the real estate market was peaking. Prices have come down since then on a national average basis, and rebounds have been inconsistent.

Some strategizing is required if you’re renewing a mortgage on a home worth less than you paid or, worse, you owe more than your home is worth. You’re basically fine if you stay with the same mortgage lender, but refinancing could be tricky.

Nationally, the average resale home price has fallen 18 per cent since the peak of February, 2022. Ms. Parubets cited some recent examples of falling home values from the Greater Toronto Area, with data supplied by a company called RPS Real Property Solutions. One shows a downtown condo that was appraised at $585,000 in summer, 2024, with an estimated value that is 2.6 per cent less at $569,800.

Another example is a townhouse in Burlington, Ont., that dropped by $73,000 in value. It was appraised at $1,100,000 in summer, 2023 and is now estimated to be worth 6.6 per cent less at $1,027,000. Another Burlington home that was appraised at $1,240,000 in summer, 2023, is now estimated to be worth 3.9 per cent less at $1,191,300.

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Renewing mortgages from traditional lenders like banks shouldn’t be a problem if your home has fallen in price. “The bank will not ask you about your value if you’re just renewing,” Ms. Parubets said.

Likewise, Victor Tran of TMG The Mortgage Group said it’s possible that a straightforward transfer of your mortgage to another lender can be done without the new lender reappraising a home. But if you want to refinance – borrow more money, in other words – then a full appraisal would be needed to confirm the current market value of the home.

Refinancing is a popular debt-management strategy because mortgages typically offer the lowest cost of borrowing. By rolling various consumer debts into a mortgage, you should be able to make your debt load more manageable. However, you need to have at least 20 per cent equity to refinance your home.

Falling below 20 per cent equity would prevent you from refinancing, and from extending your amortization on renewal. A longer amortization would offset some of the increase in mortgage payments caused by renewing at higher rates.

Being underwater – owing more on a mortgage than the property is worth – is a discouraging position for buyers, especially given the hype over homes as investments. Mr. Tran noted that fixed-rate mortgages set up during the pandemic were at ultralow levels, which meant a higher proportion of payments went toward knocking down the principal.

On the other hand, variable-rate mortgage costs have soared. Some borrowers with this type of mortgage kept the payments level, with more money covering interest and less going to principal. Another type of variable rate mortgage reduces or increases the size payments according to which direction interest rates are going.

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Mr. Tran offered an example of how someone who bought a house for $500,000 and made the minimum 5 per cent down payment could easily find themselves underwater. The amount borrowed in this case would be $494,000, including the cost of mortgage default insurance.

You’ll notice that right off the top, the borrower has just 1.2 per cent equity. If the market value of the home drops even a couple of percentage points, the mortgage would be greater than the amount the house would generate if sold.

If your home is worth less than you owe, Mr. Tran advises you to keep that information to yourself. “Try to negotiate with your current lender and keep your fingers crossed.”

One final thought for renewers is to start strategizing at least six months before the renewal date. Get a sense of where mortgage rates are compared with when you bought a few years ago, and the rough value of your home. If you haven’t heard from your lender, reach out to start negotiations.

Ms. Parubets said that while variable-rate mortgages are generating more interest these days as interest rates fall, lots of borrowers are going for the security of a fixed term of three or four years. Four years takes us just beyond the next U.S. presidential election.

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