Credit stress at Canada’s mid-sized banks is rising steadily as borrowers grapple with rising renewal rates and a weak economic backdrop, despite continued declines in borrowing costs.
A new report from Morningstar DBRS warns that “Credit stress at Fairstone continues to accelerate” [Bank of Canada] and fair [Bank]and Laurentian continues to show resilience. “
The report focuses on Canada’s rated mid-cap banks (MSBs): Equitable Bank, Laurentian Bank of Canada and Fairstone Bank of Canada (including its subsidiary Home Trust Company). Currently, all products are rated BBB by Morningstar DBRS, with a stable trend.
The credit rating agency said rising unemployment, still-high interest rates and tariff-related uncertainty are taking a toll on borrowers, particularly in the quasi-prime or alternative mortgage space where mid-sized lenders specialize.
“These MSBs offer Canadian borrowers a viable option, specifically targeting specific segments of the mortgage market, including the self-employed, newcomers and those with limited credit histories,” the report states.
The shift comes as the Bank of Canada’s policy rate has been trending lower, including a 25 basis point cut in September that brought the overnight rate to 2.5%, and is widely expected to be cut by another 25 basis points on Wednesday, the agency said.
“Despite the downward trend in Bank of Canada overnight rates… we expect credit deterioration to continue into 2026 as mortgage rates remain elevated and tariff uncertainty persists, affecting overall market sentiment,” the report said.
Fairstone and Equitable see impairment rates rise
Morningstar DBRS found that conditions deteriorated most at Fairstone and Equitable, which focus more on uninsured near-prime borrowers. Fairstone’s mortgage impairment rate reached 2.2% as of the second quarter, compared with 0.3% at the end of 2022, while Equitable’s mortgage impairment rate rose to 1.1% from 0.2%.
By comparison, Laurentian Bank’s ratio remains below 0.4%, roughly in line with the Big Six banks. “However, the credit risk of the MSBs we rate is manageable and charge-offs are low,” the analysts said.
The report attributes much of the deterioration to mortgage repricing. “Most mortgages have been repriced at higher rates at renewal, significantly increasing monthly repayments for many borrowers,” it said.
Morningstar DBRS added that Fairstone’s provisions for credit losses “skyrocketed to over 104 basis points in the first quarter of 2025 before declining to 35 basis points in the second quarter of 2025.” Equitable’s provisions have also been rising in recent quarters, reaching 16 basis points as of the third quarter, the report noted, while Laurentian’s provisions have remained largely stable and at lower levels over the same period.
Why Close Prime Borrowers Feel This First
The report noted that borrowers near prime, or Alt-A, loans — self-employed people, new Canadians and those with previous credit problems — were hit the hardest. These loans typically have shorter terms of 18 months to two years, compared with three years or more in the prime market, which “results in near-prime mortgages repricing more quickly when the Bank of Canada overnight rate rises rapidly to a peak of 5.00 per cent in July 2023.”
As a result, the average impairment rate on near-prime uninsured mortgage loans at mid-sized banks reached about 1.7% in the second quarter, up from 0.4% in the 2019-2022 period. “We believe these near-prime mortgage borrower types are generally more vulnerable” to current economic conditions, the report said.
The report also highlights the geographic concentration of risk, noting that lenders’ exposure is “primarily concentrated in Ontario…where the housing market has experienced the greatest stress” and that this weakness is also seen in British Columbia.
Losses are still limited, but risks still exist
Despite rising delinquencies, actual loan losses remain low. Morningstar DBRS calculates that Fairstone’s net charge-offs are less than 2 basis points of total residential mortgage loans, while Laurentian’s net charge-offs are “virtually zero.” Equitable’s charge-offs are also expected to be minimal.
“We believe that good underwriting practices, low uninsured lifetime value and adequate reserve levels provide adequate buffers in this challenging environment,” the report said. Banks’ capital buffers also remain strong, with Fairstone’s common equity tier 1 (CET1) ratio at 14.2%, Equitable at 13.3% and Laurentian at 11.3%, well above OSFI’s minimum ratio of 7.0% for mid-cap banks.
While lower policy rates are providing some relief, Morningstar DBRS warned that “credit deterioration… [is expected] Entering 2026, mortgage rates remain high and tariff uncertainty persists, affecting overall market sentiment. “
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Last modified: October 27, 2025
