Canadian homeowners facing higher rates at renewal this year might look enviously at the American system, where a mortgage rate can be locked in for three decades. But that long-term certainty comes with a trade-off that is leaving many U.S. homeowners feeling stuck rather than secure.
About 60 per cent of Canadians with mortgages are expected to renew in 2025 and 2026, with roughly one third of them facing higher rates than what they signed up for. Many took advantage of five-year mortgage rates that dipped below 1.5 per cent about five years ago, a deal that looked unbeatable at the time.
South of the border, Americans who locked into 30-year fixed mortgages at the bottom of the market continue to enjoy rates that fell below three per cent, according to data from the Federal Reserve Bank of St. Louis. Today, the average 30-year mortgage rate in the U.S. sits at 6.95 per cent, a gap that has made those old low-rate loans extremely valuable to hold onto.
The ‘Lock-In Effect’ Freezing U.S. Home Sales
That value comes with a catch known as the lock-in effect, in which homeowners are reluctant to sell because they cannot transfer, or port, their ultra-low mortgage rate to a new property. Frank Cassidy, a former U.S. federal housing commissioner who is now senior director at Walker & Dunlop, one of the largest commercial real estate finance and advisory firms in the U.S., said the effect has left the housing market somewhat stalled.
Cassidy said the 30-year fixed structure took hold in the U.S. because the loans were government-backed and consumers valued the security of a locked rate. But he noted that security typically costs about one percentage point more than a comparable Canadian five-year rate, and because the mortgage is tied to the property rather than the borrower, moving can become expensive. Some homeowners, he said, simply hold onto properties and rent them out rather than give up a low rate — pointing to his own rental properties financed at two to three per cent as an example.
While U.S. homeowners cannot carry their mortgage to a new home, Cassidy said they can sell a property along with its existing mortgage and rate attached. The complication is that rising home prices mean a buyer would often need a second mortgage or substantially more equity to bridge the gap, which can make sales harder to complete. Cassidy said he believes the fix for the U.S. market lies in supply-side measures that would help bring prices down.
Canada’s Own Slowdown, and Its Different Mortgage Culture
Canada is not immune to a slowing market either. National home sales in August were down 6.9 per cent from a year earlier, according to the Canadian Real Estate Association, while new home construction was down almost five per cent from a year earlier over the first eight months of the year, according to Canada Mortgage and Housing Corporation.
Jason Mercer, chief economist with the Toronto Regional Real Estate Board, said he doesn’t favour one mortgage system over the other, noting that both evolved differently over decades and have simply become convention. He said part of the difference traces back to how mortgages are funded, pointing out that five-year bond sales are more common in Canada. Mercer also noted other factors shaping each market, including the deductibility of mortgage interest in the U.S. and the absence of capital gains tax on the sale of a principal residence in Canada.
Mortgage Rates and Housing Market Snapshot
Why Longer-Term Mortgages Haven’t Caught On in Canada
Despite the appeal of rate certainty, Canadians have shown little interest in longer fixed terms. Demand for 10-year fixed-rate mortgages remains low even though they can be roughly a percentage point higher than five-year terms, according to industry figures cited in the report.
A mortgage industry source identified as Stillman said the trade-off between flexibility and rate certainty is unavoidable, since Americans cannot refinance without losing their existing rate — something no one wants to do while rates are rising. Stillman argued that Canadians who could have locked into a 10-year mortgage near 2.5 per cent largely didn’t, even though five-year rates were being written as low as 1.35 per cent at the market’s bottom. He said borrowers were instead focused on maximizing what they could afford and minimizing monthly payments.
Mortgage broker Ron Butler said lower home prices in the U.S. can still encourage homeownership despite higher rates, and noted that American borrowers can walk away from a mortgage by handing the keys back to the lender without further consequence. He contrasted that with Canada’s condo market, where builders can pursue buyers who fail to close on pre-construction units. Butler said 10-year mortgages make up less than one per cent of the Canadian market, which he attributed to a housing environment shaped mostly by continuous booms.
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