Report highlights continuing mortgage strain amid weakening economy
Canada’s mortgage market faced growing strain in mid-2025 as many homeowners renewed at higher interest rates while job losses and affordability issues worsened, according to a new commentary from DBRS Limited (Morningstar DBRS). The magnitude of the fallout would depend on how the ongoing trade war unfolds.
The Bank of Canada lowered its policy rate to 2.50% after eight cuts since June 2024, but the US trade war still hurt the job market. Unemployment rose to 7.1% by August 2025, up from 6.7% a year earlier. As a result, prime mortgage defaults climbed to 23 basis points in June 2025, compared to 19 basis points the previous year.
"Mortgage defaults continue to be highly correlated with unemployment and, to a lesser extent, house price decreases," DBRS said. “As unemployment increases, more households could face a cash flow shortage that could lead to an increased number of mortgages in arrears.”
Mortgage renewals and affordability squeeze
Many Canadians will renew their mortgages at higher rates over the next two years. DBRS said that for every 1% rise in mortgage rates, households would need to spend about 4% more of their income on payments for an uninsured mortgage, and about 4.5% more for an insured one. The mortgage debt service ratio rose to 7.85% in Q2 2025, mainly due to higher renewal costs.
Despite these headwinds, the report noted that “credit risk is partially mitigated by the stress tests that require borrowers to be qualified at the greater of the minimum qualifying rate or the contractual mortgage rate plus 2%.”
The consumer savings rate, while down from 6.2% in Q2 2024, remained elevated at 5.0% in Q2 2025, well above pre-pandemic levels.
Housing market activity and policy response
National average unit sales were largely flat year over year as of June 2025, but activity rebounded at the start of Q3, with unit sales and prices up 5.7% and 1.9%, respectively, by August.
In major markets, the Greater Toronto Area saw seasonally adjusted unit sales drop 4.9% year over year in Q2, before rebounding 8.8% in August. The Greater Vancouver Area followed a similar pattern.
To address affordability, the federal government announced new legislation in June 2025 to eliminate the GST for first-time buyers of new homes valued up to $1 million and reduce the GST for homes between $1 million and $1.5 million.
However, Canada Mortgage and Housing Corporation (CMHC) projected that restoring affordability to 2019 levels would require between 430,000 and 480,000 new housing units built annually for the next decade, a target that remains elusive.
Resilience, but risks remain
Household net worth and home equity have provided a buffer against downside risk, with the average Canadian household holding an estimated net worth of $1.08 million, including $389,000 in home equity. The real estate equity ratio stood at 73.7% in Q2 2025.
Still, DBRS cautioned that “the large wave of mortgage renewals at higher rates, combined with rising unemployment, could lead to higher delinquencies and potential losses.” The situation remains fluid, and the resilience of Canadian households will be tested as economic and policy headwinds persist.
