In its latest annual risk outlook, the Office of the Director of Financial Institutions (OSFI) warns that more than a third (about 36%) of Canadian mortgages will be renewed by the end of 2026.
Despite a 200 basis point reduction in interest rates since June 2024, many borrowers will still face higher payments when renewing the visa compared to the original rate.
The latest report from Equifax in Canada found that 6% of borrowers who renew mortgages in 2024 increased their monthly payments by $500 or more. In Ontario and British Columbia, this number is even higher, with 10% renewals experiencing this increase.
OSFI specifically notes that its fixed payments are particularly vulnerable due to its initial low lending rates, fixed-rate mortgage holders and variable-rate mortgage holders.
Especially for borrowers with fixed payment rates, especially those with the highest increase in payments after renewal. This risk is nothing new – OSFI has raised concerns about these mortgages many times in the past, highlighting potential issues related to negative amortization and payment shocks, while when interest rates are low after extended periods of interest rates.
While the decline in interest rates helps to mitigate variable interest rates for fixed payments, OSFI said it could also lead to new interest on these collateral products.
Mortgage violations, while still below pre-pandemic levels nationwide, are expected to rise as borrowers face these payments. The larger Toronto area and the larger Vancouver area are expected to feel more acutely stressed due to higher regional mortgage debt and property valuations.
Equifax data also showed that mortgage defaults continued to climb at the end of 2024, with balances rising 43% year-on-year. In addition, the mortgage tax rate exceeds
OSFI also points to the ongoing pressure in the Canadian apartment market. Amid a decline in demand from investors and homeowners, the backlog of completed apartment construction has led to oversupply, increasing economic uncertainty in the real estate sector.
“Changes in the economic environment, such as potential U.S. protectionism-driven unemployment and increased uncertainty, could lead to more vulnerable markets in the market being unable to repay their mortgage debt,” OSFI noted.
OSFI strengthens supervision of mortgage risks
To address these growing risks, OSFI said it has strengthened oversight of mortgages.
“We continuously monitor the risk profile of institutional residential mortgage activities through advanced analytics and a strong examination framework to ensure mortgage lenders adhere to prudent underwriting standards [and] Portfolio and account management practices…” said the regulator.
OSFI also reiterated expectations for lenders to provide positive support to borrowers facing financial difficulties.
As part of a risk reduction strategy, OSFI is conducting a loan-to-income (LTI) limit on the proportion of lenders’ uninsured mortgage portfolios, which may include loans that exceed 4.5 times the borrower’s income.
“This work raises OSFI’s oversight acumen to the concentration of risks in the mortgage space and our ability to mitigate these risk concentrations,” OSFI said.
OSFI has also adjusted its approach to mortgage renewal, eliminating the requirement for uninsured borrowers to pass the minimum pass rate (stress test) when switching lenders to renew directly.
The change is designed to give borrowers flexibility in finding competitive update options without facing additional eligibility barriers, especially as mortgage payments rise.
Other risks highlighted by OSFI
In addition to real estate, OSFI also identifies integrity and security as the highest overall risks to the Canadian financial system, driven by increased geopolitical tensions and cybersecurity threats.
Additional risks include wholesale credit risks due to economic uncertainty and funding and liquidity challenges arising from potential volatility in financial markets.
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Annual Risk Outlook Deadline Canada Fixed Payment Mortgage Loans to Income CAP LTI Lender Principal OSFI OSFI Annual Risk Outlook Stress Test
Last modified: March 14, 2025
