Canada is further along the slowdown as mortgage renewals squeeze consumers

Canada’s economy looks further along the slowdown than most had hoped as a large wave of mortgage renewals squeezes consumer budgets and cools spending.

The Bank of Canada lowered its policy rate to 2.5% in mid September, citing softer growth and a weaker labor market, after reporting that GDP fell about 1.5% in the second quarter.

The central bank reiterated that it is committed to a 2% inflation goal, but the path to stability increasingly runs through household cash flow.

The question is not only how low rates go, but how quickly borrowers can reset without crimping demand for goods and services.

Canada’s mortgage market relies heavily on terms that roll every few years, which means 2025 and 2026 are busy renewal years.

A Bank of Canada analytical note in July estimated that about 60% of mortgage holders up for renewal over those two years will see a payment increase, with the average monthly bill roughly 10% higher for 2025 renewals and 6% higher in 2026, assuming market-implied rates and no change in mortgage type.

That scenario underscores why consumption is wobbling even as policy rates ease. There are offsets, and they matter.

The federal banking regulator says the riskiest cohort of variable-rate mortgages with fixed payments has shrunk compared with the peak of the rate shock.

In its latest Annual Risk Outlook, OSFI reported the share of mortgages in negative amortization has fallen by about 60% from 2023 highs as borrowers and lenders adjusted and borrowing costs receded.

OSFI said in its Annual Risk Outlook: “we continue to promote active management of the risks posed by VRMFP mortgages through adequate loan loss reserves and early intervention with borrowers vulnerable to payment shock.”

Even so, the watchdog expects delinquencies to drift higher from unusually low levels as renewals reset at higher rates than the original loans.

For now, the hard-default indicators remain contained; CMHC reported that arrears on insured mortgages ticked up to 0.30% in the second quarter, a small increase from a year earlier but still below historic norms.

Insolvency statistics tell a similar story of gradual pressure rather than a cliff.

For the 12 months through July, consumer insolvencies rose 3.5% from the prior year, a pace that points to stress building at the edges while the majority of households continue to service debts.

The Bank of Canada has been easing since mid-2024, with cumulative reductions that have lowered benchmark borrowing costs but not enough to erase the gap between today’s renewal rates and the ultra-low contracts written during the pandemic.

Internally, policymakers have warned that higher debt-service costs will keep weighing on discretionary outlays until the renewal bulge passes.

That is one reason recent market commentary has flagged frictions in funding as quantitative tightening winds down and repo market strains occasionally flash in the background.

Many borrowers still benefit from rising wages and accumulated equity. Household balance sheets remain large in aggregate, as seen when Canadian household net worth hits C$17.9 trillion in Q2, giving some owners room to refinance or draw on lines of credit if needed.

At the policy level, Ottawa and provincial authorities continue to juggle housing supply and affordability tools, though internal assessments have long flagged a grim outlook for Canada’s housing crisis, which complicates any relief on shelter costs.

The bottom line is that Canada’s slowdown is being led by the household channel at a time when policy is already supportive.

That combination suggests the next few quarters will feel heavy for rate-sensitive sectors, even as the broader financial system remains resilient. The squeeze is real, but so are the shock absorbers.