Canada’s central bank is performing a dangerous balancing act. The Bank of Canada’s (BoC) latest Financial Stability Report (FSR) shows mortgage impairments surged in Q1 2025—enough to trigger internal alarms, but not enough to consider a problem. However, the question isn’t whether risks are growing (they are), but who’s in trouble: struggling families or overleveraged investors? Failing to identify where risks are rising can stick taxpayers with the bill for an investor bailout, presented as a social good.
Canadian Banks See Mortgage Impairment Surge 65% From Lows
Mortgage impairment rate at Canada’s largest banks.
Source: Bank of Canada.
Canada’s largest banks have seen a sharp increase in mortgage impairments. The latest data shows the rate climbed 4 basis points (bps) to 0.43% in Q1 2025, rising 17 bps since the 2022 lows. That might seem small, but impaired loan volume climbed 10% in the quarter and 65% since lows. That’s an incredibly rapid acceleration.
The 0.43% seems benign on paper—similar to 2019’s pre-pandemic “normal.” A point emphasized by the BoC, as it wasn’t exactly a crisis year. However, the acceleration occurred during a period when everything was fine. Their concern is that a prolonged trade war can crumble already eroding data.
The Hidden Timebomb: Bank of Canada Downplayed Mortgage Issues
Canada’s central bank isolated large lenders in its take, overstating market health. The BoC notes medium-sized lenders have a higher impairment rate, but dismissed it as a small share: $150 billion vs the largest banks’ $4.3 trillion. Medium-sized banks also cater to riskier borrowers, which they dismissed as a matter of business model. That doesn’t represent the general market, they suggest.
Dismissing this downplays the rising market share these banks have seen. For example, if these lenders had a 2% impairment rate added to the total, the impairment rate would be 0.5%—similar to the rate reported after the 2012-Global Financial Crisis. Back then, medium-sized banks had a much smaller share of the market. What we’re seeing is a redistribution of liabilities.
It’s also not wise to dismiss them based on the fact that they take on high-risk clientele. Riskier clients are often passed on from large banks, and would otherwise be their liability. This is a unique characteristic of Canada’s banking system, since mortgage amortizations are longer than repayment terms. It conveniently compartmentalizes risk reporting, but not risk to the general financial system.
Canadian Mortgage Borrower Stress: Homebuyers Or Investors?
Mortgage delinquency is very different from other loans. Consumer loan impairment is a sign of household stress. People stop making phone and car payments because they can’t. A mortgage is the last thing a consumer stops paying, and lenders offer many tools to prevent that from happening. Changing payment terms, refinancing to extract equity, etc.
If those tools fail mortgage borrowers, they can list their home for sale before falling into default. Heck, a long-time owner would walk away with a profit and feel like a genius. Only when a property can’t sell before critical impairment does it become a problem. Mortgage delinquency is a strong sign of liquidity, not household strength.
In Canada, the inability to dispose of a property before it falls into arrears is rare. Sellers with equity can slash the asking price until it becomes attractive to buyers. Since Canadian home values are much higher than they were 5 years ago, those who can’t slash prices due to a lack of equity are primarily recent buyers. This buyer cohort is when investors began to replace first-time buyers.
Investors behind rising mortgage impairment should surprise no one. There are so many red flags, it looks like a Soviet military parade:
- Banks are offering “blanket appraisals,” where they recognize the purchase price as the property value for pre-construction condos. Investors represented the largest demographic of pre-construction condo apartments, and those looking to liquidate need to do so at market prices lower than their mortgage liability.
- Mortgage amortizations have seen the maximum extended to 30 years, up from 25 years. Originally presented as a tool for first-time buyers, eligibility was quietly expanded to investors.
- Canada’s mortgage insurance cap was increased by 50% to $1.5 million. It’s unclear how many first-time homebuyers need high-leverage loans to buy homes 50% more expensive than a typical home in Toronto. What is clear is that lenders can buy state-backed insurance for conventional loans that appear risky.
If overleveraged investors are responsible for the rise in mortgage impairment, this wouldn’t be the first time the public was mislead on the data. The US subprime mortgage crisis was blamed on easy credit given to low income borrowers with bad credit. An in-depth study later found that borrowers with subprime credit only saw a slight uptick in defaults. The surge was mostly multi-property investors with prime credit, who used subprime lenders for more leverage. Once again, highlighting the fact that a mortgage is the last thing an end-user stops paying.
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