Bank of Canada: Decline in home prices may limit refinancing options for some Toronto borrowers

Ottawa —

The Bank of Canada warned that falling home prices could become a new pressure point for some mortgage holders, especially in the Toronto area, where borrowers may face difficulties refinancing when their loans come up for renewal.
The bank explained that most mortgage holders have so far managed the increase in monthly payments at renewal, and there has been no widespread rise in loan losses among financial institutions.
However, the problem arises with a specific group of highly indebted borrowers who need to refinance to reduce payments or manage their obligations, at a time when the decline in home prices has reduced the equity available to them.
According to the bank’s estimates, about 4% of borrowers renewing their mortgages in 2027 may not be able to refinance at current home prices. In the Toronto area, the percentage rises to about 9%.
If home prices fall an additional 10%, the affected proportion could rise to about 7% nationwide and 12% in the Toronto area.
The bank said that falling prices do not necessarily pose a problem for households able to continue payments, but it becomes more serious when a borrower needs to refinance and does not have enough equity to meet lenders’ conditions.
The risks appear clearer in markets that have seen the largest declines since the peak of the pandemic period, especially in Ontario and British Columbia, where prices have fallen and listings have increased compared to sales.
The Bank of Canada pointed out that pressures are concentrated among Toronto area borrowers who obtained mortgages in 2022 and 2023, i.e., during the period of high prices and variable interest rates, representing a small but more vulnerable segment within the mortgage market.
Nevertheless, the bank sees the broad renewal shock as nearing its end, as most large payment increases are expected to be absorbed by the second half of 2027.
The key message confirms that the Canadian mortgage market has not yet experienced a widespread crisis, but falling home prices may trap a limited group of borrowers, not only due to rising payments but because they have lost the ability to use their home value as a refinancing tool.