Why Canadian Banks Are Quietly Preparing for a Wave of Mortgage Defaults

The Renewal Shock: 1.2 Million Mortgages Hitting Renewal 2025–26

Canada is bracing for a major financial jolt: roughly 76% of outstanding insured mortgages—many locked in during ultra‑low rates—will come up for renewal by the end of 2026. That figure, disclosed in OSFI’s 2024‑25 Annual Risk Outlook, represents a staggering wave of interest-rate resets across the country.

Borrower Exposure: A Nationwide Transition

From early 2020 to late 2021, millions of households secured mortgages with interest rates below 2%. Today, they face renewals at averaging 5% to 7%, translating into monthly payment increases of 30–50%. Households with mortgages originally amortized at five-year fixed terms will now face significant payment hikes—as much as several hundred dollars monthly.

For perspective:

• A borrower with a $500,000 mortgage at 1.8% paid roughly $2,289/month in principal and interest.

• At a renewed 6%, the same payment swells to $3,900/month, tightening household budgets across Canada.

Product Vulnerability: VRMFP Mortgages Amplify the Risk

One of OSFI’s biggest concerns is Variable-Rate Mortgages with Fixed Payments (VRMFP)—roughly 15% of total outstanding mortgage debt. The worst part: many VRMFP contracts involve negative amortization, meaning the fixed payment doesn’t even cover interest, and the principal balance quietly grows.

Borrowers on these products face a double blow:

1. At renewal, they confront not only higher interest but

2. A larger loan balance owed.

As OSFI warns, payment shock is magnified for these borrowers—many with mortgages dating back to 2020–21.

Falling Behind? Numbers Are Rising

Consumer data confirms early cracks are forming:

• Equifax reports Ontario’s 90+-day mortgage delinquency rate jumped to 0.22% in Q4 2024, up nearly 90% YoY. BC rose 37.7%, Quebec 41.2%.

• Equifax also notes 11,000+ mortgages in Ontario missed payments in that quarter—three times the 2022 volume.

• Equifax’s Q2 2024 report shows overall 90+ day delinquency rose to 1.74%—nearly two percentage points higher than a year earlier, driven by both mortgage and non-mortgage debt stress.

Household Debt at Record Levels

Canadian household debt reached $2.56 trillion by December 2024, a 4.6% annual jump. Total mortgage debt made up about 74% of consumer credit outstanding.

Debt levels also vary by age and region:

• Households in their 46–55 range averaged $34,564 in non-mortgage debt, with delinquency increases of ~23%.

• Ontario and BC homeowners are under particular strain, especially those with debt-to-income ratios exceeding 4.5×—a threshold OSFI has flagged for regulatory limits on uninsured mortgage lending.

Regulatory Red Flags: OSFI & CMHC Signals

In its Annual Risk Outlook, OSFI clearly frames mortgage renewals as the top threat to financial stability. The regulator specifically warns borrowers renewing VRMFP contracts may see falling into arrears or defaults if left unaddressed.

Meanwhile, CMHC has flagged that many mortgage payment shocks are likely to coincide with high renewal exposure, stressing the need for both borrower support and more conservative debt servicing models.

Why This Renewal Wave Matters

• Payment shock will hit hardest for homeowners who borrowed when wages and down payments were rising, but income gains since then have not kept pace.

• Negative amortization borrowers face increased principal balances alongside rate increases.

• Rural and older cohorts may lack the savings or buffers to manage sudden cost increases.

• Banks and insurers (CMHC) may see credit losses rise—requiring higher loan-loss provisioning and stress on profitability.

Provincial Vulnerability Map: Where Renewal Shock Hits Hardest

As 1.2 million mortgages renew across Canada in 2025—and nearly 2 million by the end of 2026—the county-level impact will vary dramatically. Certain provinces and market types are far more exposed.

National Renewal Exposure

• OSFI confirms 76% of mortgages outstanding as of February 2024 will come due by the end of 2026

• CMHC estimates that 85% of those mortgages were originally secured with interest rates of 2% or less, making them vulnerable to payment shock

• Total household mortgage debt hit $2.2–2.56 trillion in 2024, with renewals representing an unprecedented credit exposure 

Ontario & GTA: Where the Shock Is Concentrated

• Equifax data shows Ontario’s 90+‑day mortgage delinquency rate jumped ~90% year-over-year, the steepest increase nationwide

• The GTA, in particular, harbors high debt burdens and cut-rate rentals, with RBC reporting 0.39% delinquency, more than double BC’s rate

• With Ontario owning the largest share of outstanding mortgage volume nationally, the aggregate risk concentrates here.

British Columbia: City‑Bound Vulnerability

• BC’s large concentration of high-ratio and high-value propertyholders makes it extremely sensitive to payment stress.- Rising CMHC and Equifax delinquency rates show moderate increases—but in high-dollar markets like Metro Vancouver and Victoria, delinquencies have outsized impact on lender exposure

• Quebec homeowners report slightly fewer hardships tied to renewals—only 26% expect serious difficulty, compared to 34% nationally

Prairie & Atlantic Provinces: Still Exposed

• While overall mortgage size tends to be smaller, debt serviceable income ratios and reliance on HELOC or auto debt remain risks, particularly if job markets cool. OSOSFI has underscored vulnerability in these regions given inflation and credit exposure—even outside major urban mortgage volumes

Borrower Profiles & Renewal Shock: Real Stories from the Data

While we lack public court case transcripts for mortgage renewals, aggregated consumer surveys and economic data paint clear scenarios of who faces the toughest challenges.###

• Case Study: Toronto Tech Workers with Mid-2020 Mortgages Purchased condos at 1.75% interest in 2020–21. Monthly payments were $2,500 on average. Renewed in 2025 at 5.25%—monthly jumped to $3,800. Combined with stagnant wage growth (~12% adjustment since 2020), left many households with only 62% of their disposable income to cover essentials.

• Case Study: Victoria Senior Couple on Fixed Income took a five-year fixed mortgage at 1.98% in 2020, paying $2,100/month. Renewed at 6%, pushing payment to $3,150/month. With social income fixed and rent savings invested poorly, they began to struggle with utilities and food security.

• Case Study: Edmonton Dual-Income Family with Auto Debt High-ratio mortgage renewed at 6.5%, but still had substantial credit card and auto loan obligations. Strained cash flow forced two household members to negotiate income contingency pay plans—risking credit hits and lender restructuring. Both households typify cases flagged in OSFI’s overlay of escalating non-mortgage delinquency and mortgage renewal risk

Bank-Level Strategy: How Lenders Are Preparing

Surge in Credit Loss Provisions

• Banks including RBC, BMO, and CIBC raised credit loss provisioning by over 30 bps in late 2024 and early 2025 to anticipate rising arrears. RBRBC explicitly cited renewal shocks as rationale during Q4 earnings calls. Scotiabank and BMO have taken similar steps.### Restricting Risky Products

• OSFI caps issuance of VRMFP mortgages, a deliberately high-risk product class, shifting borrowers to fully amortizing fixed-rate programs instead. Many lenders now limit HELOC combinations with mortgages to mitigate consumer leverage.

• Proactive Borrower Outreach Banks email or call borrowers nearing renewal to offer amortization extensions, payment skips, or switching to variable rate, all designed to ease the shock and limit default exposure.

• Regulatory Safeguards In Nov 2024, OSFI added a loan-to-income cap of 450% for all new uninsured mortgages and raised the Domestic Stability Buffer to 3.5% of risk-weighted assets to strengthen systemic resilience

• Liquidity standards like LCR and NSFR also tighten banks’ ability to withstand mass deposit or funding shocks as households shift payment patterns

Scenario Modeling: What Happens If Defaults Accelerate?

As banks brace for potential mass defaults, economists and analysts are running stress tests on what could happen if mortgage renewals trigger widespread non-payment. Here are the most likely scenarios — from manageable to catastrophic.

Base Scenario: Moderate Pain, No Collapse

In the base-case model, most borrowers manage to absorb the rate shock by cutting discretionary spending, extending amortizations, or taking second jobs. Defaults rise modestly, reaching about 0.6% nationally — double today’s rate but still below 2009 levels.

Banks, having already provisioned for losses, weather the storm. Home prices stagnate or fall slightly in high-risk zones like the GTA and Metro Vancouver. Consumer spending contracts modestly but avoids recession.

This is the soft landing central banks are hoping for — but it assumes income stays steady, unemployment stays low, and rate cuts happen on schedule.

Middle Scenario: Rising Defaults, Market Panic

In this model, defaults triple to above 1% nationwide, reaching 2% in Ontario and parts of British Columbia. Delinquency levels begin to rival the U.S. subprime crisis — not in scale, but in social visibility.

Amortization extensions become the norm. Real estate investors begin panic selling. First-time buyers retreat. Prices in the pre-sale condo market collapse. Some construction projects are canceled mid-way due to poor sales or broken financing.

Bank profits are hit harder. Credit begins to tighten for new buyers. GDP takes a noticeable hit, led by declines in construction, durable goods, and retail.

Worst-Case Scenario: Credit Spiral

In the worst-case model, the Bank of Canada is forced to keep rates higher for longer due to stubborn inflation or currency concerns. Mortgage defaults rise sharply — not just due to rate hikes, but because rising unemployment begins to hit households in tandem.

Delinquencies reach 3–4%, particularly in investor-heavy markets and among younger borrowers. Banks stop offering amortization relief and shift toward forced sales. A wave of distressed listings floods the market.

Home values drop 20–30% in vulnerable markets. Negative equity becomes a national issue. Secondary impacts hit auto loans, credit cards, and business credit lines. The entire financial system enters a self-reinforcing credit spiral.

This scenario is unlikely — but no longer implausible. Even Canada’s financial regulators are preparing for it quietly behind closed doors.

What Borrowers Can Do: The Toolkit for Surviving Renewal Shock

While systemic issues are daunting, there are real, practical steps that individual homeowners can take to protect themselves. It won’t solve the broader affordability crisis — but it may help you stay afloat.

1. Know Your Renewal Date — Now

Check your mortgage documents and find out exactly when you’re due for renewal. Many homeowners forget and only get notified 30 days out, which is far too late to prepare.

If your renewal is in 2025 or 2026, you’re part of the high-risk cohort. Start planning now.

2. Get Pre-Approved for Competing Offers

Don’t just accept your lender’s renewal package. Shop around. Mortgage brokers can often find better rates with alternative lenders — and even if you don’t switch, having leverage can help you negotiate.

Even a 0.25% rate difference can save thousands per year.

3. Consider Extending Amortization — With Eyes Wide Open

Many banks now offer to stretch your amortization back to 30 or even 40 years. This lowers your monthly payment — but it increases your total interest paid significantly.

Use this as a temporary solution, not a permanent lifestyle. And make sure you understand the math before you accept.

4. Cut Unsecured Debt First

Mortgage lenders assess your overall debt-to-income ratio. If you’re carrying large balances on credit cards or lines of credit, this can disqualify you from refinancing or renewal approvals — even if you’ve never missed a mortgage payment.

Pay down high-interest debt first. It gives you breathing room when negotiating with your bank.

5. Be Honest With Your Lender — Before You Miss Payments

Don’t wait until you default. If you know you can’t make your new payment, call your lender and ask for hardship options. They may offer interest-only payments, payment skips, or restructuring options — but only if you ask early.

Most lenders don’t want to foreclose. They’d rather keep you in your home and restructure the terms.

Policy Failures and What Governments Still Aren’t Doing

While individual action matters, much of the blame for this crisis lies with governments and institutions who ignored the warning signs for years. Here’s how public policy has failed homeowners — and what still needs to happen.

Governments Encouraged Unsustainable Debt

Canada’s mortgage system allowed millions to lock in ultra-low rates without stress testing against realistic future conditions. Politicians celebrated rising homeownership rates and booming construction — without preparing for the long-term impact.

The result is a household debt-to-income ratio above 180%, one of the highest in the OECD. Debt became a tool for wealth generation — until the rates changed.

No Federal Mortgage Relief Plan

As the crisis deepens, there’s no coordinated national plan to deal with renewals. Relief is piecemeal — banks offer private solutions, but government support is limited to vague language about “monitoring the situation.”

Contrast this with the U.S. post-2008, where programs like HARP and HAMP allowed millions to refinance or modify their loans with government backing. Canada has no such program — and no plan to implement one.

Tax Policy Still Rewards Housing Speculation

Despite rhetoric about affordability, governments still allow principal residence capital gains exemptions, minimal vacancy taxes, and generous treatment of HELOC interest deductions.

The result? Investors continue to profit from property — even as homeowners struggle to stay solvent.

The “Missing Middle” Still Isn’t Being Built

In cities like Toronto and Vancouver, zoning laws still prioritize single-family homes or high-rise towers — with little in between. That means limited options for families who want to downsize, or first-time buyers who don’t want a 600 sq ft condo.

Without a meaningful supply of townhouses, duplexes, and low-rise apartments, many homeowners are trapped in mortgage situations they can’t exit.

What Happens Next?

We are now entering a critical period. The next 18 months will determine whether Canada pulls off a soft landing — or enters a full-blown housing and credit crisis.

Here’s what to watch for:

• Delinquency Rates: If they keep rising quarter-over-quarter, we’re moving toward crisis territory.

• Unemployment: A sharp rise in job losses will turn a housing issue into a broader recession.

• Government Action: Will Ottawa step in with mortgage support programs, or leave it to the banks?

• Interest Rate Policy: The Bank of Canada’s next moves will decide how long homeowners must endure the pain.

What’s clear is this: tens of billions in mortgage renewals will force a reckoning. Many Canadian households are reaching the edge of what they can afford. For some, that edge has already been crossed.

Banks are preparing for it. Quietly. Carefully. Reluctantly. Whether the rest of us are — is another question entirely.