The Office of the Superintendent of Financial Institution (OSFI) has released its Annual Risk Outlook for 2024/2025, highlighting mortgage credit defaults as a primary concern for Canada’s economy. With 76% of mortgage debt set to renew by the end of 2026, the bank regulator warns that the impact will be most significant for those who took on substantial debt during the record-low interest rate period between 2020 and 2022.

OSFI has identified variable rate mortgages with fixed payments (VRMFP) as a specific area of concern, estimating that roughly 15% of mortgage debt is exposed to these terms. The rapid increase in interest rates has led to negative amortization for many of these loans, with borrowers seeing their debt increase rather than being paid off.

The regulator expects the rise in mortgage payments to result in a higher incidence of residential mortgage loans falling into arrears or defaults. Signs of payment stress have already been observed in non-performing loans, with delinquency rates climbing in markets such as Toronto.

“If mortgage rates remain elevated, the financial commitment required by borrowers to return to their contractual amortization (for example, lump sum payment, mortgage payment increase) may put financial strain on many of those households,” the regulator wrote.

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