Buying a House in 2025: 4 Things to Know

If 2024 was a year of calm for Canadian real estate, 2025 might be the storm that follows.

Home buyer demand was suppressed this year by a trio of barriers — elevated mortgage rates, stringent mortgage requirements and inflation-fuelled financial pressures — that might all crumble by the spring of next year.

If buying a home becomes more affordable or appealing, it will create a wave of demand that our undersupplied housing markets can’t handle. When competition flares, buyers, as if sucked through a wormhole by rapidly rising prices, may find themselves on the outside looking in again.

Mortgage rule changes and lower rates could make buying a home more affordable in 2025, but that doesn’t mean it’ll get easier. The real advantage goes to those who understand what’s coming and plan accordingly

1. New insured mortgage rules will only benefit certain buyers

On December 15, 2024, insured mortgages will be available for properties priced up to $1.5 million. (Currently, only properties sold for less than $1 million qualify for mortgage insurance.)

Once the new rule kicks in, buyers will no longer be required to provide a down payment of 20% for homes priced between $1 million and $1.5 million.

A $1 million home purchase, for example, will require a down payment of $75,000 instead of $200,000. Buyers pushed to the sidelines by today’s gargantuan down payment requirements will gain newfound access to markets where homes are regularly priced over $1 million.

This change does nothing to help buyers with smaller budgets, though, or those living in markets with fewer million-dollar properties. It might only move the needle in Greater Toronto, Greater Vancouver and Victoria, or in the luxury segments of cities like Calgary, Ottawa and Montreal.

Ironically, smaller down payments create their own financing challenges: massive mortgages that are harder to qualify for.

If you were to buy a $1 million home with a $75,000 down payment, your monthly mortgage costs, including over $200 in mortgage insurance premiums, would be about $5,352. You’d need to earn a household income of at least $170,000 to afford it.

Considering the average household income in Toronto was pegged at $129,000 during the last census, many buyers are going to fall short where income is concerned. If you’re in this cohort, you’ll need to come up with more than a minimum down payment to make the numbers work in your favour.

2. 30-year amortizations: Helpful, but costly

Another new mortgage rule, also landing on December 15, allows first-time home buyers and anyone purchasing a newly constructed home to obtain an insured mortgage with a 30-year amortization period.

A longer amortization means lower mortgage payments, which can improve monthly cash flow and help you qualify. But taking advantage of a 30-year amortization will cost you a ton in extra interest.

Let’s say you purchase a home worth $669,630, the national average sale price in September, according to the Canadian Real Estate Association. You’re lucky enough to have a 20% down payment, so your mortgage is $535,704. With a 25-year amortization and a rate of 4.5%, your total interest cost would be $353,789. Opt for a 30-year mortgage and you’ll pay $436,693 in interest.

That’s a difference of more than $80,000. But your monthly mortgage payment in the latter scenario would be about $260 lower, which might be enough to get you into the mortgage you need.

The affordability boost is seductive, but you should weigh your options carefully when choosing an amortization period. If you can qualify for a mortgage with a 25-year amortization, do it and save yourself some money. If a 30-year is your only option, plan to pay off as much of your mortgage ahead of time as your prepayment privileges allow.

3. Lower mortgage rates will only get you so far

Variable mortgage rates will continue shrinking with each Bank of Canada rate cut. If the bank shaves another 100 basis points off the overnight rate between now and the middle of March, the lowest variable mortgage rates will be somewhere around 3.75%, lower than today’s best fixed rates.

A sub-four percent rate will improve affordability, but only by so much. The difference in monthly payment between a 4.5% rate and a 3.75% rate on the 25-year mortgage we discussed above is about $220 dollars. That’s not nothing, but lower rates might not be enough to change the game for you.

There’s also the stress test, your debt service ratios and your down payment savings to think about. Coming out of a period of high inflation, questions to consider include:

If the stress test limits how much you can borrow, is there enough money in your down payment fund to make up the difference?
If your debt service ratios are too high, do you have additional cash on hand to pay down some of your debt load?

If you’re planning a winter or spring purchase, start the mortgage pre-approval process now. A mortgage broker or bank mortgage advisor can run the numbers for you and share strategies for improving your creditworthiness.

4. Lower immigration targets won’t reduce home prices

Canada is set to slash its immigration targets in 2025. According to the federal government, the number of permanent resident admissions will drop from 500,000 to 395,000, while the temporary resident population is expected to fall by almost 446,000 compared to 2024 levels.

The reductions will please Canadians who wrongly blame immigrants for high housing costs, but they won’t make homes more affordable. Reducing the number of newcomers doesn’t compensate for years of underbuilding or reverse the rising number of single-person households, two complex factors driving Canada’s housing crisis.

“We don’t expect lower immigration targets will bring home prices down under our base case economic scenario. But they will keep them flatter than otherwise would be the case,” Robert Hogue, assistant chief economist at RBC, wrote on November 4, 2024.

In a housing market where supply meets demand, a reduction in population growth generally drives home prices lower. But that isn’t Canada today, and it won’t be Canada in 2025.

Final thoughts

This probably wasn’t the most optimistic home buying pep talk you’ve ever received. Sorry about that, but it’s important to realize that if Canada’s housing market does get a jump-start in 2025, it’s going to mean a return to the competitive environment in which so many buyers struggled to succeed.

The best way forward is to be realistic about the challenges, clear-eyed about your choices and proactive with your mortgage. Specifically:

Check your credit score. If it’s below 680, look into ways you can improve it over the next few months.
Pay down your debts. The less debt you’re carrying, the more you’ll be able to borrow..
Talk to a mortgage professional. Find out how the topics discussed here impact your home buying prospects.

A re-awakened housing market might throw all kinds of challenges at you. The sooner you get ready for it, the sooner you’ll be able to adjust.