Declining Home Prices Pose Risk to Canada’s Financial System

Canada’s housing market is cooling — and the ripple effects could run deeper than just falling home values. As property prices continue to slide in key regions, financial regulators are warning that the risk to Canada’s overall financial system is growing. With high household debt levels, elevated mortgage balances, and stretched affordability, even a modest drop in home prices can put pressure on banks, insurers, and the broader economy. This article explores how falling home values could threaten financial stability — and what it means for homeowners, lenders, and policymakers

What OSFI’s Latest Warning Means for Canada’s Housing Market

On April 18, 2023, Canada’s top financial watchdog, the Office of the Superintendent of Financial Institutions (OSFI), released its second Annual Risk Outlook. The report raised concerns about the country’s financial system, pinpointing two major threats: declining home prices and rapidly rising interest rates.

OSFI made it clear: a sharp drop in property values, combined with high mortgage debt, could pose serious risks for homeowners, lenders, and mortgage insurers alike.

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Variable Rate Risk

OSFI flagged variable-rate mortgages as a key area of concern. Many Canadians opted for these products when interest rates were low, but now that rates have surged, they’re approaching what’s called the trigger rate.

The trigger rate is the point at which your entire mortgage payment goes toward interest—nothing is left to pay down the principal. Once that happens, unless borrowers voluntarily increase their payments, they start accumulating negative amortization. That means their mortgage balance actually grows.

To counter this, OSFI is stepping up its monitoring of federally regulated financial institutions (FRFIs). While it’s not predicting a collapse, the regulator is clearly preparing for the possibility of further housing market weakness.

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Loan-to-Value Risks

Falling property prices mean many Canadians now owe more on their mortgage than their homes are worth. This is where Loan-to-Value (LTV) ratios come in. LTV measures the amount of your mortgage loan as a percentage of your home’s current market value.

If your LTV goes above 100%, it means you’re in negative equity—a dangerous spot for both you and your lender. As home values dropped in 2022 and 2023, more borrowers found themselves in this position.

The magic number for regulators is 75%. Above that, the risk for insurers and lenders increases significantly. And according to recent insurer data, a growing number of Canadians are surpassing this threshold.

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Default Insurer Risk

Canada’s three main mortgage default insurers—Canada Guaranty, Sagen, and the CMHC—have all seen a sharp rise in high-risk mortgages.

• Canada Guaranty reported that by the end of 2021, over $4 billion in insured mortgages had an LTV over 100%.
• Sagen had $14 billion (10% of its book) with LTVs above 95%.
• CMHC saw a jump from 1.2% to 2.8% in high-LTV mortgages within a year, totaling $5 billion in riskier loans.

These figures suggest a growing number of households could struggle to repay their loans if interest rates remain high or home prices fall further. The risks aren’t theoretical—they’re showing up in real-time insurer data.

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Stress Test and Trigger Rate Risks

During the pandemic, when mortgage rates were historically low, borrowers stretched their budgets to buy homes. Some qualified only because of those low rates. The mortgage stress test was supposed to prevent over-borrowing, but enforcement weakened over time.

Now, those same borrowers are seeing their payments balloon. Many are discovering their payments no longer cover even the interest portion of their mortgage.

This leads us to another risk: the trigger point. This is when the balance you owe on your mortgage exceeds the original loan amount. It’s a sign you’re going backward, not forward, on your loan.

Lenders aren’t obligated to intervene until your LTV hits 100%, but by then, the damage may be done. Proactive borrowers can adjust their payments to stay ahead, but many don’t know they’re at risk until it’s too late.

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Frequently Asked Questions (FAQ)

What is a trigger rate?
It’s the point at which your entire mortgage payment goes toward interest. You’re no longer paying down the loan itself.

How do I calculate my trigger rate?
Formula: (Payment x # of annual payments) / Balance owing x 100. Example: If your biweekly payment is $1,800 and you owe $651,000, the trigger rate is about 7.19%.

Are all variable mortgages affected by trigger rates?
No. nesto offers adjustable-rate mortgages, where payments increase with the prime rate. That helps avoid negative amortization.

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Final Thoughts

While Canada’s housing market isn’t in freefall, the risks are stacking up. From variable-rate shocks to dangerously high LTVs, the pressure is building.

Homeowners need to be proactive: understand your mortgage terms, monitor your home’s value, and keep an eye on your payment structure. Refinancing, switching to a fixed rate, or even making lump-sum payments can help reduce risk.

At Mortgage.Expert, we help Canadians make informed mortgage decisions. If you’re feeling the strain of rising rates or worried about your LTV, let’s talk. We’re here to help you navigate uncertainty with confidence.

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