What Happens to Your Mortgage If the Economy Collapses?
Amid uncertain economic backdrops and current events, being informed is one of the important things you can do to be financially secure. With this, you can safeguard one of your most valuable assets, your home, by being aware of how a downturn in the economy impacts your mortgage.
This article explores the best Canadian mortgage practices, what to do during interest rate swings, and smart financing options during economic downturns.
How does an economic downturn impact mortgage holders in Canada?
When Canada encounters an economic collapse, lenders and borrowers can experience pressure on different fronts. For homeowners across the country, this could result in varying monthly payments, lending standards being tightened, and more stringent refinancing alternatives available.
The Bank of Canada lowers its interest rate to stimulate greater borrowing and lending activity amongst consumers and at the corporate level during periods of economic turmoil. One notable and recent example would be the COVID-19 pandemic in 2020 , where rates fell to 0.25%, among the lowest in modern history. This event heavily reduced borrowing costs for Canadians.
While interest rates did fall, the flexibility from lenders generally tightened. Banks reassessed risk from borrowers with more detail, refinancing options became harder to come by, and higher income verification became routine. Among collapses and similar events, even with lower rates, access to the credit markets can be at the whim of contracting as lenders approach deals with more scrutiny.
What happens to interest rates during a recession in Canada?
During recessions, the Bank of Canada is essential to keeping the economy stable. It modifies the overnight lending rate, which has an indirect effect on fixed-rate products and a direct impact on variable-rate mortgages.
Recessions have historically led to significant rate cuts:
| Year | Economic Event | Bank of Canada Overnight Rate | Mortgage Rate Trend |
|---|---|---|---|
| 2008-2009 | Global Financial Crisis | 4.5% → 0.25% | Variable rates plunged |
| 2015 | Oil Price Crash | 1.0% → 0.50% | Small decline in fixed rates |
| 2020 | Covid-19 Pandemic | 1.75% → 0.25% | Historic low rates under 2% |
Although low policy rates make borrowing less expensive, they also indicate economic strain. Since fixed-rate borrowers' rates are more reliant on bond yields than on temporary policy changes, the impact is more gradual.
Do interest rates go up or down during a recession?
While not always the case for all mortgage types, interest rates generally decrease during recessions.
| Mortgage Type | Usual Trend In Recession | Explanation |
|---|---|---|
| Variable Rate | Decrease rapidly | Tied to Bank of Canada rate cuts |
| Fixed Rate | Slight Decrease | Influenced by the bond market |
| HELOC/Adj. Products | Decrease then stabilize | Banks lower prime rate buy may raise margins |
Rate reductions do not always translate into cheaper expenses for all borrowers. You might not be eligible for the best opportunities if your lender tightens margins or your credit score declines.
“Falling rates help qualified borrowers, but those facing job insecurity may find it harder to refinance or renew.”
— Steven Crowe, Mortgage Agent Level 2 , Clover Mortgage
What are my mortgage refinancing options during a recession?
During a financial crisis, refinancing is a great way to lower monthly payments or combine your debt. However, Canadian homeowners should consider certain items before fully committing, including eligibility, penalties, and timing. To determine which option is best for you, follow these steps:
- Review your current mortgage: look at your rate, term, and balance. Use online rate comparison sites and brokers to get different perspectives and quotes
- Communicate with your lender: see if your lender can adjust your rate to the market level or lower. This is contingent on your payment history and relationship with the lender
- Amortization: Extending your repayment period could lower monthly payments and improve short-term cash flow
Can you break a mortgage during a recession without heavy penalties?
You may be able to lock in a lower rate by breaking your mortgage early, but the penalties can vary based on the type of mortgage you have.
Banks rarely waive penalties, even during recessions, though some might provide blend-and-extend options, which combine old and new rates. Before acting, it's important to determine the possible savings.
Is switching from a fixed to a variable rate smart during an economic downturn?
Your level of risk tolerance and the direction of interest rates will determine your choice.
| Scenario | Best Option | Rationale |
|---|---|---|
| Rapid rate cuts | Switch to variable | Immediate cost savings |
| Prolonged uncertainty | Stay fixed | Protection against future rate hikes |
| Short remaining term | Wait to renew | Avoid penalties and reassess later |
In the past, short-term savings were higher for borrowers with variable rates during recessions. Rates may quickly rise again, though, if the recovery leads to inflation (as it did in 2022–2023).
“Variable rates can offer short-term relief, but if the economy rebounds fast, borrowers could see payments climb again.”
— Victoria Ishai, Mortgage Agent Level 2 , Clover Mortgage
How do lenders assess risk during a recession?
When the economy collapses, lenders become more cautious. The Office of the Superintendent of Financial Institutions (OSFI) instituted the mortgage stress test to make sure borrowers could withstand rate increases of 2% or more over their contract rate.
Key factors lenders emphasize include:
- Employment stability: Employees who work for themselves or on commission are subject to more scrutiny
- Debt service ratios: Total Debt Service (TDS) and Gross Debt Service (GDS) must stay below 44% and 39%, respectively
- History of credit: Missed payments or rising credit utilization can trigger rejections, even with a high income
Will government programs help with mortgage relief in a crisis?
The Canadian government frequently steps in with short-term mortgage relief programs during times of financial distress. Here are some examples of government established programs during crises:
- Mortgage Deferral Program (2020) : during the pandemic, homeowners were able to postpone their mortgage payments for up to six months
- CMHC Flexibility Guidelines (Ongoing) : the ongoing CMHC Flexibility Guidelines allow insurers to prolong amortization periods for homeowners who are struggling financially
- First-Time Home Buyer Incentive (2019–Present) : A shared-equity program designed to lower monthly mortgage payments for eligible first-time buyers.
Although these programs can give people some much needed flexibility, deferrals are not the same as forgiveness. Interest is still charged on deferred payments, which raises your total loan balance.
What mortgage mistakes should I avoid during a recession?
When the economy contracts, consumer sentiment and collective fear can drive poor financial decisions. Avoid these common pitfalls below:
- Panic refinancing: this can account for break fees or potential rate increases
- Transferring to riskier products: a common example is unregulated private mortgages
- Ignoring your lender's communication: proactive conversations frequently result in adaptable solutions
- Excessive credit extension: doing this via cash-out refinances or HELOCs that eventually put a strain on affordability
“Don’t chase the lowest rate, find the mortgage that fits your long-term stability.”
— Rushi Parikh, Mortgage Agent Level 2, Clover Mortgage.
Conclusion
An economic downturn doesn’t necessarily mean losing your home, but it does mean being proactive and informed.
Understanding your mortgage terms and dynamics is crucial whether you're renewing, refinancing, or any other similar situation. Contact Clover Mortgage today to find the best option for you and your mortgage, regardless of market conditions and economic uncertainties.
FAQ:
Can I stop paying my mortgage during an economic crisis?
No. Missed payments can damage your credit and result in foreclosure unless you are enrolled in an authorized deferral program.
Will the government forgive mortgages during a collapse?
Canada has traditionally granted deferrals rather than forgiveness. The entire balance is still the homeowner's responsibility.
Is it smart to refinance when rates drop suddenly?
The amount of the penalty and the remaining term determine this. Refinancing may be beneficial if your savings outweigh the cost of terminating the mortgage.
