Most Canadians have weathered periods of high interest rates and economic shocks, including the pandemic. However, some households and businesses remain vulnerable due to high levels of debt, particularly in regions with elevated housing prices, the Bank noted in its report.
Alongside high household debt, global trade volatility is another risk on the BoC’s radar. The central bank says it’s watching for signs that shifting trade conditions could trigger financial stress, emphasizing the need for strong capital buffers and liquidity to help institutions weather potential shocks.
“Near-term unpredictability of U.S. trade and economic policy could cause further market volatility and a sharp repricing in assets, leading to strains on liquidity,” the Bank said, adding that in extreme circumstances, this could turn into market dysfunction.
Mortgage renewals to stretch household budgets
According to the report, most Canadian mortgage holders have shown resilience to rising interest rates, with many having been stress tested at higher rates when their loans originated and others building up financial buffers over time.
However, about 60% of outstanding mortgages are set to renew in 2025 or 2026, and many of these borrowers—especially those who locked in ultra-low fixed rates during the pandemic—will face higher payments.
While interest rates have come down over the past year, the report’s data suggests that most renewing borrowers will still see higher costs, though not as sharply as previously expected.
Most mortgage holders will face smaller increases compared to last year’s projections, reflecting the recent shift in rate expectations. Still, the transition may not be painless. Some borrowers will likely need to cut back on spending or draw from their savings as they struggle to keep up with non-mortgage debt.
“Most households renewing their mortgage will have seen their income grow, and many have enough financial assets to fund higher payments for at least a year,” the report notes. “But this does not mean it will be easy. Many households will have to adjust their spending to manage higher payments, and some may have trouble keeping up with payments on other debt.”
These risks are especially pronounced for households in trade-sensitive industries, where job or income losses could make it harder to manage rising payments.
Canadian banks remain well-positioned to absorb financial shocks
While many households face mounting pressures, Canada’s banking sector remains in strong shape, according to the BoC, with large banks benefiting from robust capital buffers, rising provisions for loan losses, and continued access to stable funding.
However, there are early signs of stress in the mortgage portfolios of medium-sized banks, which often cater to higher-risk borrowers or more concentrated regional markets. These lenders have seen a more noticeable rise in mortgage impairments compared to the country’s larger banks.
While mortgage delinquencies at large banks remain low by historical standards, recent increases suggest that some borrowers are starting to feel the strain of past rate hikes and rising living costs.
Stress-testing conducted by the Bank of Canada and the IMF suggests that even in a scenario where house prices fall by 26%, large banks would remain solvent and above regulatory capital requirements.
Nonetheless, credit losses would mount under such conditions, especially in consumer and commercial real estate portfolios.
According to the BoC, if financial stress on households were to intensify, banks could tighten lending standards, which would lead to reduced credit availability and a weaker housing market.
While household indebtedness has come down slightly over the past year, with the debt-to-disposable-income ratio declining from 179% to 173%, the Bank remains cautious about the risks ahead.
“With interest rates lower now than a year ago, the Bank is less concerned than it was about the impact of high borrowing costs on debt serviceability,” the report notes. “However, the trade war is threatening jobs and incomes, particularly in trade-dependent industries. Some affected households may become unable to continue making debt payments.”
Trade tensions may add pressure to housing and mortgage markets
As detailed in Scenario 2 of the BoC’s Monetary Policy Report released last month, a prolonged trade war could severely weaken the Canadian economy, adding pressure on households with mortgages.
In this scenario, rising arrears and falling property values could add to financial stress, particularly for recent homebuyers and those in regions more exposed to trade-sensitive industries.
Smaller banks could be especially vulnerable, given their concentrated exposure, and a broad tightening in credit availability would add further strain on already fragile households and housing markets.
“Small and medium-sized banks tend to have a more pronounced focus on mortgage lending,” the BoC notes. “They are also often regionally concentrated, which, in some cases, could imply higher exposure to trade-sensitive industries.”
Even so, the BoC’s stress tests indicate that Canadian banks remain well-positioned to weather severe economic shocks, thanks to their strong balance sheets. However, substantial credit losses could still force them to tighten lending to protect their capital ratios, the Bank said.
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Last modified: May 8, 2025