Variable-rate mortgages are regaining popularity in Canada just as slower population growth, a softening labour market and a subdued housing market add pressure for borrowers heading into 2026. Despite those headwinds, a new Morningstar DBRS commentary expects the residential mortgage market to remain “reasonably resilient” in 2026.
Morningstar DBRS said mortgage portfolios at Canadian banks and credit unions are supported by “generally solid credit fundamentals and rigorous lender regulatory underwriting standards (i.e., mortgage stress test and loan-to-income ratio requirements),” which continue to underpin credit quality amid a soft housing market and tariff-related economic uncertainty.
Still, Morningstar cautioned that pressures are building beneath the surface, particularly as a large share of mortgages reprice at higher rates and variable-rate borrowing regains momentum. Credit deterioration is expected to continue, albeit at a manageable pace, with risks unevenly distributed across regions and borrower types.
Variable-rate mortgages make a comeback
After nearly disappearing during the height of the Bank of Canada’s tightening cycle, variable-rate mortgages are once again taking a larger share of new originations — a shift Morningstar is watching closely.
“Variable rate mortgages once again gained in popularity as the spread between variable and fixed rates narrowed,” said Carl De Souza, senior vice-president and sector lead at Morningstar DBRS, during a recent webinar discussion of the report.
Variable-rate mortgages were a dominant product during the ultra-low-rate period of the pandemic, peaking at about 60% of new uninsured originations in early 2022, before falling sharply as interest rates rose. Their share dropped to roughly 27% by November 2024, but has since rebounded to about 46% by November 2025, according to Morningstar and Bank of Canada data.
De Souza noted that the resurgence in variable-rate mortgage popularity has occurred as bond yields, and, by extension, fixed mortgage rates, have remained “higher than most anticipated.”
The renewed uptake is reviving regulatory and investor concerns tied to fixed-payment variable-rate mortgages, particularly those that experienced negative amortization during the rapid rate hikes of 2022 and 2023.
“An increasing prevalence of these fixed-pay variable rate mortgages can potentially increase the payment shock when the contractual amortization needs to be restored at maturity,” De Souza said. He added that it could also “increase the tail risk if the amortization periods are extended at maturity in a refinancing in order to make the payments more affordable and reduce that payment shock.”
Morningstar acknowledged that major banks have made progress in managing this risk. De Souza said the big six banks “have been able to notably reduce the proportion of 30-plus year mortgage amortizations,” helped by borrower lump-sum payments and proactive engagement.
“That doesn’t mean it’ll always be the case going forward,” he said. “So again, we continue to monitor.”
2026 renewals add pressure despite solid credit fundamentals
Beyond product mix, a heavy wave of mortgage renewals will continue to test borrower resilience in 2026, as loans originated at ultra-low rates reset into a higher-rate environment.
According to Morningstar DBRS, around 1.15 million mortgages are set to renew in 2026, with the Bank of Canada estimating that roughly one-third of borrowers renewing by year-end will face higher payments. The average monthly payment could rise by about 6%, with the impact most pronounced for fixed-rate borrowers.
“Five-year fixed rate mortgage borrowers will likely see a significant average payment increase of around 15% to 20%,” Morningstar DBRS said in the report. It added that around 10% of variable-rate, fixed-payment mortgage borrowers are expected to see payment increases of more than 40%, as amortizations are restored at renewal.
Despite those pressures, Morningstar said mortgage portfolios at Canadian banks and credit unions have so far avoided more severe credit stress. “Prudent underwriting practices, characterized by robust borrower qualification standards, have helped them to avoid significant deterioration in their mortgage lending portfolios,” the report noted.
Alt-A mortgages show sharper credit stress
While prime mortgage portfolios continue to perform relatively well, Morningstar DBRS flagged mounting stress in the Alt-A segment, where borrowers tend to renew more frequently and at higher rates.
“This is, I would say, the chart of the year,” said Shokhrukh Temurov, vice-president, North American Financial Institution Ratings at Morningstar DBRS, referring to Alt-A mortgage performance across three rated Canadian medium-sized banks. “It’s interesting not because of the blue line or red line… it’s specifically because of actually the yellow line, which is Alt-A mortgages.”
Alt-A borrowers — including self-employed individuals, new immigrants with limited Canadian credit history and borrowers with prior credit challenges — are typically more exposed to economic downturns and rate shocks.
“Credit pressure on these Alt-A mortgages increased after Q2-23, as most Alt-A borrowers renewed their mortgages at significantly higher rates,” Shokrukh said, adding that they now face a “major increase in monthly payments.”
As a result, Morningstar DBRS said the impairment ratio for those medium-sized banks’ Alt-A portfolios reached nearly 1.9% in Q3 2025, while cautioning that performance at unrated lenders could be weaker.
“There’s a high chance that the credit quality performance of Alt-A mortgages offered by other unrated institutions could be even worse,” Shokrukh said, noting that the data should be “interpreted very cautiously.”
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Last modified: February 1, 2026