BOC Rate Direction, Mortgage Penalties and More!
You may want to understand the impact of the BOC and direction going forward based on today’s announcement.
THE BANK OF CANADA HOLDS OVERNIGHT RATE AT 2.75%
As of July 30, the Bank of Canada is holding its policy rate at 2.75%, continuing its neutral, wait-and-see approach. This reflects steady inflation, strong wage growth, and stable unemployment. Despite ongoing global trade uncertainty, markets have adjusted to the lack of resolution and are prepared to wait.
Where Are the Overnight Rate and Prime Headed?
The overnight rate currently sits at 2.75%, with the Prime rate at 4.95%.
Here’s how the Big Six banks see things unfolding:
Scotiabank expects a single 25-basis-point cut in early 2026, lowering the overnight rate to 2.50%, where it’s projected to hold through the end of the year.
RBC forecasts no further changes, with the overnight rate remaining at 2.75% through 2026.
TD and CIBC both anticipate one 0.25% cut by Q3 2025, bringing the rate to 2.25%, with no additional moves expected afterward.
BMO and National Bank have the most dovish outlooks, projecting a drop to 2.00% by Q1 2026. National Bank sees room for one more 25-basis-point cut after that.
Thinking About Breaking Your Mortgage? Read This First
Maybe you've found a better rate, you're moving, or consolidating debt. On the surface, breaking your mortgage might seem like a smart financial move. But before you sign on the dotted line, take a close look at the prepayment penalty—it can eat up your savings or worse.
What Is a Prepayment Penalty?
A prepayment penalty is a fee your lender charges if you end your mortgage term early. It’s how they recover the interest they expected to earn.
In Canada, the penalty is usually whichever is greater:
Three months’ interest
Interest Rate Differential (IRD)
If you have a variable-rate mortgage, you’ll typically pay three months of interest. If you have a fixed-rate mortgage, lenders often apply the IRD, which is usually higher.
Understanding the Interest Rate Differential (IRD)
IRD is more complex—and potentially much more expensive.
What it is:
The IRD measures how much more interest you’re paying compared to what the lender could earn by re-lending the money at today’s rates.
Key point:
The bigger the gap between your current rate and the lender’s rate for the remaining term, the higher your penalty.
Example:
Balance: $400,000
Current rate: 4.80%
Time left: 2 years
Lender’s current 2-year posted rate: 3.00%
Calculation: (4.80% – 3.00%) × 2 × $400,000 = $14,400 penalty
That’s more than triple the cost of the three-month interest penalty.
Why Penalties Vary So Much
It all comes down to how lenders calculate the IRD.
Big banks often use posted rates, which are higher, inflating the penalty.
Monoline lenders (non-bank lenders via mortgage brokers) usually use discounted rates that reflect actual market conditions.
Result: Two homeowners with similar mortgages can face very different penalties based solely on their lender.
How to Reduce or Avoid the Penalty?
Here are some strategies:
Ask questions upfront
Before signing, ask how the lender calculates penalties and understand the math.Choose the right lender
Monoline lenders often have more transparent and lower penalty structures.Consider a variable-rate mortgage
Typically only charged three months’ interest if broken.Look into blend-and-extend options
Some lenders allow you to blend your current rate with a new one to avoid a full break.Use your porting option
Moving? Some lenders let you transfer the mortgage to your new home penalty-free.Wait it out
As you near your term’s end, the IRD penalty often shrinks. A few months can make a big difference.
📈 Mortgage Renewals in 2025–2026: What to Expect
New research from the Bank of Canada shows that many Canadian homeowners with 5-year fixed-rate mortgages are heading toward significantly higher payments when they renew in 2025 or 2026—even with recent interest rate cuts.
🔍 Who’s Most Affected?
Borrowers with 5-year fixed-rate terms renewing in 2025 or 2026
This group makes up ~40% of all mortgages in Canada
📊 Payment Increase Estimates
15%–20% average increase in monthly payments by renewal
Compared to December 2024 payment levels:
Renewals in 2025 → ~10% increase
Renewals in 2026 → ~6% increase
⚖️ It’s Not the Same for Everyone
✅ Who Might See Lower Payments
Variable-rate, variable-payment borrowers:
May see a 5%–7% decrease in paymentsVariable-rate, fixed-payment borrowers:
Outcomes vary widely, depending on:How much principal they’ve repaid
Whether they’re in negative amortization
📉 25% of these borrowers could see a 7%+ decrease
🔺 10% could face 40%+ increases, especially those with negative amortization
💡 Prepayment Behavior Matters
Many borrowers have taken action to reduce the impact of rising rates:
Among those who originated or renewed before March 2022:
80% paid more than required
On average, they repaid 3× the required principal
Only 5% had a higher balance by early 2025 than at origination
(vs. 25% expected based on contract alone)
These proactive borrowers will likely face smaller payment shocks at renewal.
🧠 Key Takeaways
Don’t assume your payment will stay the same at renewal, even with falling rates.
Start budgeting early if your mortgage is up for renewal in the next 1–2 years.
Track your amortization status—especially if you’ve been on a fixed-payment variable mortgage.
Consider voluntary prepayments now, if possible, to reduce your renewal shock later.
Talk to a mortgage advisor to model out your specific renewal scenario.