Regulator ramps up monitoring amid rising renewal risks
Canada’s financial regulator is raising concerns about mortgage payment shocks, warning that a significant number of borrowers could face steep increases when their mortgages renew in the coming years.
In its latest Annual Risk Outlook, the Office of the Superintendent of Financial Institutions (OSFI) noted that more than one-third (36%) of Canadian mortgages will be up for renewal by the end of 2026.
While the Bank of Canada has lowered interest rates by a total of 200 basis points since June 2024, OSFI said many homeowners still face significantly higher payments compared to their original mortgage rates.
The regulator pointed out that borrowers who took out fixed-rate mortgages and those holding variable-rate mortgages with fixed payments are particularly vulnerable because they initially benefited from historically low interest rates. OSFI stressed that borrowers with fixed-payment variable-rate mortgages could see especially sharp increases in monthly payments upon renewal.
Equifax Canada highlighted similar concerns, noting that 6% of Canadians who renewed mortgages in 2024 saw monthly payments increase by $500 or more. In Ontario and British Columbia, the situation was even more pronounced, with about 10% of borrowers experiencing payment hikes of this magnitude.
Mortgage defaults have also started climbing, Equifax reported, with balances past due rising 43% year-over-year by the end of 2024. While mortgage delinquency rates nationwide remain below pre-pandemic levels, OSFI expects defaults to rise further as homeowners adjust to increased payments. Regions with high property values and mortgage debt, such as the Greater Toronto Area and Greater Vancouver Area, could face particular stress.
Adding to these pressures is an oversupply in the condominium market. A backlog of completed condo projects has coincided with weakening demand from investors and homeowners alike, exacerbating economic uncertainty around the housing sector.
OSFI also warned that potential US trade protectionism and rising unemployment rates could worsen the situation, causing more borrowers to struggle with debt repayments.
“Changes to the economic environment, such as increases in unemployment rates and uncertainty driven by potential US trade protectionism, could lead to more vulnerable segments of the market being unable to service their mortgage debts,” OSFI said.
To counteract these growing risks, OSFI said it has intensified its monitoring of mortgage lending practices.
“We continuously monitor the risk profiles of institutions’ residential mortgage lending activities through advanced analytics and a robust examination framework to ensure mortgage lenders adhere to prudent underwriting standards [and] portfolio and account management practices,” the regulator explained.
One key step OSFI has taken is enforcing loan-to-income (LTI) limits for uninsured mortgages. Specifically, it capped the portion of lenders' uninsured mortgage portfolios allowed to exceed 4.5 times the borrower's income, aiming to prevent excessive household leverage.
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“This effort has improved OSFI’s supervisory acuity into risk concentrations in the mortgage lending space, as well as our ability to mitigate those risk concentrations,” OSFI explained.
Additionally, the regulator recently adjusted its policy around mortgage renewals. Borrowers with uninsured mortgages no longer need to meet the Minimum Qualifying Rate (stress test) when switching lenders for a straight renewal. The aim is to provide more flexibility and help borrowers secure competitive renewal terms without added qualification hurdles, especially important in the context of rising payments.
Beyond real estate concerns, OSFI highlighted other significant risks to Canada's financial stability, including increased cybersecurity threats and geopolitical tensions. Wholesale credit risks, due to economic uncertainty and funding challenges from potential market volatility, were also emphasized as key areas to watch.
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