Renewal wall pressure easing as rates fall from peaks, economist forecasts
Mortgage delinquency levels should level off in the near term and start falling in 2027 and 2028, according to new research.
The share of residential mortgages classified as arrears, meaning payments overdue by 90 days or more, hit 0.28% most recently, having climbed steadily since 2022, the Desjardins Economic Studies analysis revealed.
Senior economist Kari Norman said the increase looks more like a return to normal borrowing conditions than a sign of widespread financial distress among homeowners.
Arrears sat at just 0.14% during the pandemic, artificially suppressed by income support programs, payment deferral options and rock-bottom borrowing costs. As that support faded and homeowners rolled onto renewal at today's higher rates, monthly payments jumped for many, even as the Bank of Canada's policy rate has eased back from its 2023 high.
Renewal wall hitting recent buyers hardest
Norman's paper points to the so-called mortgage renewal wall as the primary driver of the uptick.
Borrowers who locked in ultra-low five-year fixed terms during 2020 and 2021 are now renewing into a materially different rate environment, and those with larger outstanding balances, concentrated among buyers in Ontario and British Columbia who purchased at pandemic-era peak prices, are absorbing the biggest payment shocks.
Ontario has seen the steepest deterioration of any province, moving from having the lowest arrears rate in the country to sitting above the national average. Desjardins found that arrears have climbed fastest among mortgage holders carrying high loan-to-income ratios, particularly recent originations in the Toronto market.
Investor-owned units are facing separate pressure, the report noted, as softer rental demand and falling asking rents, partly tied to shifts in federal immigration policy, squeeze the numbers for landlords covering higher carrying costs against weaker income.
Labour market remains the key variable
Desjardins' analysis, which builds on prior Bank of Canada research, found unemployment to be the strongest single predictor of future arrears trends.
The jobless rate has cooled from its tight 2022 levels but remains historically low, even as longer average job search times point to lingering vulnerability among some households.
Two other macro forces are working in borrowers' favor. Home equity built up through both price appreciation and principal repayment gives many owners a cushion, with average loan-to-value ratios at origination running between 70% and 75% over the past five years. And wage growth has outpaced inflation since the pandemic began, offsetting some of the squeeze from higher living costs.
Several structural factors support Norman's stabilization call.
The wave of five-year fixed-rate renewals has largely worked through the system, and borrowers who took out three-year terms at the 2023 rate peak are now renewing into meaningfully lower payments. The mortgage stress test, which qualified most borrowers at rates well above what they currently pay, is also providing a buffer.
Credit behavior data reinforces the picture. Research cited in the report found mortgage holders typically ramp up credit card usage and start missing other bill payments before falling behind on their mortgage. By late 2025, credit card utilization among mortgage holders had started declining while the share of borrowers missing payments had leveled off, an indication that household stress may already have peaked.
Norman flagged two downside risks that could alter the trajectory: a resurgence in inflation that forces rates higher before incomes catch up, and weaker economic growth tied to trade uncertainty around the Canada-United States-Mexico Agreement review, which could push unemployment higher.
Forced sales remain rare
Entering arrears rarely results in a homeowner losing their property outright, the report noted. Ontario recorded close to 60,000 mortgages in arrears last year, yet fewer than 3,000 properties changed hands through power of sale, according to Teranet data cited in the report.
Lenders and borrowers more commonly resolve arrears through temporary repayment plans, capitalizing missed payments into the loan balance, extending amortization periods, or adding a co-borrower, with enforcement action treated as a last resort.
