Lower interest rates in Canada over the past year have predictably led to an increase in borrowing—the vast majority of which has come in the form of residential mortgages.
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03.
credit and debt
MEETING OUR OBLIGATIONS
As you've just read, Canadians are borrowing more. Can we afford to? Let's take a look. Two of the most useful measures to indicate whether borrowers can in fact afford their increasing debt obligations are the debt service ratio (DSR) and mortgage arrears, because it's not just how much you owe that matters, but also your ability to make your payments. The DSR measures how much of your income is being put towards servicing debt, while the mortgage arrears rate is the share of all mortgages that are 90 days or more behind on their payments.
DSRs peaked in Q4 2023 (after interest rates reached their apex) at an all-time high of 15.11%, including a record-high mortgage DSR of 8.18%. Since then, DSRs have been trending downwards to 14.37% in Q1 2025, before rising marginally last quarter to 14.41%. While this is still elevated from a historical perspective, it isn't cause for alarm just yet as it remains below its 2023 level, and with more interest rate cuts on the horizon, we could see some further declines.
The mortgage arrears rate, on the other hand, has been trending upward in Canada since bottoming out at a minuscule 0.14% in Q3 2022, and now sits at 0.23% (as of Q2 2025). While this increase is substantial, the current level equals the pre-pandemic record-low arrears rate. Importantly, there's evidence that the arrears rate may rise further going forward, as we explore in the next section.
ANOTHER EDITION OF MORTGAGE ADDITIONS
As one would expect, the amount of new debt taken on by Canadians over the past few years has been heavily influenced by the path of interest rates. After reaching ever-increasing record highs from the second half of 2020 through the first half of 2022, the amount of new credit extended fell sharply since then as the Bank of Canada ratcheted up its target rate. New borrowing only started to pick back up in the second half of last year as the Bank began to unwind its restrictive policy rate from a high of 5.00%.
That increase in borrowing carried on in the first half of 2025, as Canadians took on $62.1 billion in new debt, which was 22% less than in the second half of 2024 (this can be quite seasonal with Q1 often having the lowest quarterly total), but still 22% higher than the first half of 2024 when rates were higher. The increase was driven entirely by new mortgage credit, which was up 50% over the first half of last year, while consumer credit actually fell 22% (to $9.1 billion) and non-mortgage debt fell 65% (to $1.8 billion). In fact, consumer credit and non-mortgage debt both saw their lowest six-month total since the first half of 2023. Mortgages accounted for 82% of all credit extended in the first half of the year, which is the highest share of any six-month period going back to the first half of 2022.
That household borrowing has been concentrated in mortgages is positive for Canadians’ balance sheets. Mortgages typically carry lower interest rates than non-mortgage and consumer credit, and Canadian borrowers have historically prioritized making their mortgage payments on time. But as we explore later on, an increasing number of borrowers are behind on their payments.
Increasing trade protectionism, isolationism, and the rerouting of supply chains are inflationary by nature, and these changes are putting upward pressure on long-term bond yields around the world.
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Borrowing is once again on the upswing with interest rates on the downswing.. The good news for Canadians is that our ability to service our debts has remained stable.
When the Bank of Canada lowered its policy rate to near-zero in 2020 and fixed mortgage rates followed, it prompted a surge in home buying that started in the fall of 2020 and carried on into the first half of 2022. For those borrowers who opted for the 5-year fixed rate when borrowing costs bottomed out, a renewal at higher rates was inevitable.
We’ve noted in the past that most renewers would be able to afford their new higher payments, thanks to the stress test and rising incomes. But we can also see from Bank of Canada data that it’s a smaller share of Canadian homeowners that are facing a renewal with higher payments in 2025 and 2026 than initially expected.
By the end of 2026, 60% of all currently outstanding mortgages will have come up for renewal; with only 60% of homeowners having a mortgage, this means that 36% of owners will renew. Of those that renew, 42% face no change in payments, which is 15% of all homeowners. Meanwhile 24% of renewers will actually see decreasing payments—these are borrowers who already faced a post-pandemic renewal and opted for a 2- or 3-year fixed rate or those with variable-rate mortgages—which equates to 9% of owners. What’s left is just 12% of all homeowners facing increasing payments by the end of 2026, a number that suggests the impact on the wider housing market will be limited.
It’s been five years since mortgage rates dropped to historic lows, with many borrowers now facing an upcoming renewal. The share of homeowners facing higher payments, however, is smaller than expected.
A RIPPLE OF RENEWALS
When Canada’s largest banks report their quarterly earnings, the provisions for credit losses (PCLs) numbers—this is the amount of money banks set aside to deal with loans that might not be repaid in full in the future—are much scrutinized. The good news for banks and borrowers alike is that the former has been setting aside smaller PCLs of late: PCLs for Canada's five largest banks were 25% lower in Q3 2025 than in Q3 2024, although the residential mortgage component grew a modest 0.9% in that time.
The bad news, however, is that the aggregate value of gross impaired loans (GILs)—these represent the amount of loans that are already in trouble and are likely not to be repaid in full—has been rising. Across Canada’s largest banks, there were $24.8 billion in impaired loans in Q3 2025, a 17% year-over-year increase. The biggest contributor to the increase came in the form of residential mortgages, which were up 27% year-over-year to $7.2 billion in the third quarter. Increasing GILs can be an indicator that PCLs will also need to rise in the future, as banks may eventually set aside more money to account for these impaired loans. Additionally, growing GILs are a likely precursor to a rising mortgage arrears rate. The mortgage arrears rate, which we noted in the previous section has been on an upward trend but is still low from a historical perspective, is a lagging indicator as it only captures mortgages which are 90 days or more behind on their payments.
The GILs data suggest that there's pain in the residential mortgage market for some Canadians, despite the fact that total borrowing hasn't expanded to an extent that's concerning and the amount of income needed to service debt has risen only marginally. It could also be a canary in the coal mine that some borrowers will be increasingly stressed in the near future.
Canada’s largest banks have been setting aside fewer provisions for impaired loans. The actual value of impaired loans on their books, however, has been growing.
