Underwater Home? How to Handle Negative Equity

The Canadian housing market has contracted significantly since the pandemic years, reversing the sharp price gains seen between 2020 and 2022. According to the MLS House Price Index, home values have fallen about 20% from their early‑2022 peak and were down roughly 4.7% year‑over‑year.

Signs suggest the correction may continue. Home prices slipped 0.4% month‑over‑month in March, and TD Economics forecasted an additional modest decline of around 0.3% over the coming year.

What it means to be underwater

If you bought at or near the market peak, you might now have negative equity—commonly described as being “underwater.” Negative equity occurs when the outstanding mortgage balance exceeds the current market value of the property.

Many investors typically put down at least 20%, but first‑time buyers often finance homes with 5–10% down. With smaller down payments, even a moderate drop in prices can quickly put an owner into negative equity, limiting options when it comes time to renew or refinance.

Marnie Golen, a mortgage agent with Pineapple Financial in Toronto, says the profile of her clients has shifted sharply. Today, roughly 87% of her work involves refinancing, compared with about 90% of her workload in 2021 that focused on arranging mortgages for purchases.

The markets seeing the biggest declines

The rise in negative equity is concentrated in large urban centres that saw outsized gains during the pandemic. For example, Toronto condo prices have fallen by roughly 25% since 2022. Other hard‑hit areas named by mortgage broker Raja Paul include Pickering, Ajax, Oshawa, Brampton, Vancouver and Calgary — markets that experienced strong price growth during COVID followed by steep corrections.

“Out of 20 deals on my desk in April, about nine of them had a negative equity issue,” Paul said, noting that many investors purchased condos in prime locations despite weakening rental demand as remote and hybrid work became more common.

Paul expects demand for condos to recover only when renting those units becomes more expensive than carrying a mortgage, or when rental market conditions tighten enough to justify investor demand again.

How to deal with negative equity

If your mortgage is underwater, you still have options depending on your situation. Common strategies include completing a product transfer with your existing lender, paying down the mortgage to rebuild equity and switch lenders, obtaining an insured mortgage, or working with smaller or alternative lenders who may offer more flexible terms. Each approach has trade‑offs; below is an overview to help you weigh them.

Product transfer with existing lender

A product transfer is often the first recommendation for owners with negative equity. If you don’t need to borrow additional funds and are willing to stay with your current lender, many major banks allow you to move from an maturing fixed rate onto a new fixed or discounted term instead of rolling onto the lender’s higher standard or prime rate.

The main drawback is that you must remain with the same institution, which is why homeowners in negative equity are sometimes called “mortgage prisoners.” Product transfers are common among Canada’s big lenders, but availability and terms can be less favourable with some B‑tier or alternative lenders.

The challenge with rising mortgage rates
Interest rates rose sharply from 0.25% in February 2022 to 5% by July 2023, catching many homeowners by surprise when their terms came up for renewal. Although the Bank of Canada rate has since eased to 2.25%, borrowing costs remain higher than pre‑pandemic levels. The average 5‑year fixed mortgage rate is roughly 6.09% today compared with about 4.79% in 2021. If you have enough equity, extending the amortization from 25 to 30—or sometimes 35—years can reduce monthly payments, but product transfers typically keep the existing amortization in place.

Injecting more cash to switch

If you prefer to change lenders, one option is to pay the mortgage down to around 20% equity, which is generally required to qualify for an uninsured mortgage. That can involve refinancing other properties, borrowing from family, or consolidating assets—though some methods, like high‑interest unsecured loans, can be expensive and risky.

Using cash to reach a 20% equity threshold can make sense if it allows you to extend the amortization to lower monthly payments, secure a substantially better rate, or escape an unsatisfactory lender relationship.

Insured mortgage

Buyers who put less than 20% down often obtain mortgage default insurance, which protects the lender in case of default. Because the insurer remains the primary risk mitigant, new lenders are sometimes willing to take over a renewal even when the property is underwater. The downside is that insured mortgages may limit your ability to change the amortization period or alter other terms.

Alternative and private lenders

Smaller or private lenders can be more flexible with underwriting and may accept higher loan‑to‑value ratios — for example, offering lending up to 85% LTV versus the more typical 80% threshold. These lenders may also permit longer amortization periods (such as 30–35 years) to lower monthly payments. The trade‑off is usually higher interest rates and additional fees, so these options should be considered carefully and compared against mainstream offers.

Why planning ahead matters

Waiting until the final weeks before a mortgage renewal limits choices. It’s generally wise to begin exploring renewal and refinancing options about six months before your term ends. Mortgage brokers can explain alternatives, lock in competitive rates for a period (often up to 120 days) and help coordinate a smooth transition.

In some situations it may make sense to pay off a mortgage early or take other steps well before the renewal date to avoid last‑minute stress. Whether your equity position is healthy or underwater, early planning gives you time to compare offers and avoid unwelcome surprises when your mortgage term expires.