Many Canadians who signed mortgages around 2021 received rates that were close to 2%. In most cases, these loans renew on a kind of cycle that re-calculates the payment, although renewal doesn’t exactly mean they’re starting over. But it can change how much they’re paying each month.
Many will experience a renewal and a rate hike in 2026, so it’s well worth knowing what the effects could be for your mortgage, especially in terms of payment smoothing and re-amortization.
Keep reading until the end to find out how you can deal with these changes. Just remember, this is not financial advice, and you should always talk to a qualified professional before making any changes.
What rate hikes actually mean for a Canadian mortgage
Like in most countries, Canadian mortgage rates depend on the central bank’s policy rate. That’s the Bank of Canada here. They set a rate, and then lenders will set mortgage pricing around the borrowing costs in the market.
This is why you might notice that variable rates tend to move more quickly than fixed ones, although fixed mortgages can renew at different levels. The lenders adjust their rates depending on funding costs and bond markets.
Why renewals can feel sudden in Canada
One thing that does make mortgages slightly different here is that our mortgages tend to run on shorter terms than the full payoff period. Someone could have a 25-year amortization on a five-year contract, meaning that their interest rate will reset a few times. We’ll go into detail later on what re-amortization actually means.
According to academic research on Canadian mortgage design, such a structure pushes interest-rate risk towards renewal dates. It’s not spread evenly across the different decades.
Explaining payment smoothing
Payment smoothing is essentially one of the ways that borrowers try to avoid huge increases in their interest rates. They’ll increase their payments slowly before renewal. Others will change their payment structures so that the changes hit them far more gradually.
In fact, the Bank of Canada has said that lenders will sometimes give borrowers a few ways to adjust their payments. They don’t want the borrowers to have to deal with a sudden increase in interest when it’s time for the renewal agreement, as they might not be able to pay this.
The variable-rate issue
There are also variable mortgages, and these will keep the monthly payment the same while the interest rates are changing. When rates rise far enough, borrowers reach something that’s called a trigger rate. This means that any payments they make will only cover the interest.
It’s quite common for lenders at that point to increase payments or change the schedule. This way, the mortgage keeps going towards repayment. But there are some strategies to help you, and we’ll discuss them later.
What re-amortization is
You might hear people talking about re-amortization as though it’s a way of erasing debt. It’s not. It doesn’t even completely reset the clock. Instead, re-amortization spreads your remaining balance over a new timeline, usually following a one-off payment.
Making your amortization period longer will usually lower how much you’re paying each month, but you end up paying more in interest, while shortening increases your payments but allows you to pay it off quickly. Essentially, the core loan stays the same. It’s the schedule that’s different.
Strategy 1
So what can you do to deal with these changes? The first strategy involves adjusting your payments before you renew, as this could make the change feel a little smaller later. You might want to add a little to each payment or perhaps switch to a faster payment schedule.
Borrowers who are able to keep their principal payments steady when rates are rising usually fare better. They receive smaller adjustments when it’s time for renewals.
What to ask your lender for with payment smoothing
You should try to find exactly what’ll happen to your mortgage when rates change, so try asking about whether your payments will automatically increase. You should also ask about how it may affect your amortization, and what your trigger rate is, if you’re on a variable plan.
The lenders should be able to show you a payment path based on the current rules. That should make it a bit easier for you to figure out your options.
Strategy 2
The next strategy is to think about re-amortization, and it’s quite common when your renewal payments feel too high under the current timeline. Increasing your years could mean that you’re paying less, although it’ll be over a longer period.
It’s worth noting that insured mortgages usually have stricter limits on this. Canada Mortgage and Housing Corporation (CMHC) programs tend to have a cap on amortization lengths, depending on eligibility.
Strategy 3
Your third option is to get a renewal offer from a different lender. Yes, really. Academic research shows that shorter contract terms often lead to borrowers experiencing more rate resets, but longer terms cause the timing risk to change.
You should compare the structure of fixed and variable mortgages on offer, along with the term lengths. By doing so, you’ll better understand how often you’ll have to deal with another reset.
The Canadian stress test people forget
One thing to remember is that switching lenders or getting your mortgage refinanced could lead to having to undergo a new qualification check. The Office of the Superintendent of Financial Institutions (OSFI) actually requires a lot of borrowers to qualify at the higher contract rate, plus two percent. It may also be a minimum benchmark rate.
The rule stays the same, even when someone’s made payments for many years. Refinancing paperwork may be a little stricter than you might expect.
Sources: Please see here for a complete listing of all sources that were consulted in the preparation of this article.
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