Declining Home Prices Pose Risk to Canada’s Financial System

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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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Payment Shock on Renewals

Even borrowers who secured low, fixed mortgage rates won’t be immune. According to the Bank of Canada’s 2023 Financial System Review, most fixed-rate mortgages are set to renew by the end of 2026—and that’s when the real payment shock begins.

• In 2022, the debt-to-income coverage ratio on new mortgages rose from 16% to 19%, the highest in over a decade.
• Mortgages with DCRs above 25% jumped from 12% to 29%.

By renewal time, many Canadians will see their monthly payments increase by 20% to 25%, depending on their rate and term. That could mean hundreds—or even thousands—more out of pocket each month.

Borrowers should brace themselves now. Knowing your renewal date, budgeting in advance, and using tools like payment shock calculators can help reduce the strain. Working with a mortgage broker or advisor can also uncover options to soften the impact—like switching lenders or renegotiating terms.

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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.

Will my mortgage payments go up at renewal?
Most likely, yes. Even if you have a fixed-rate mortgage, your renewal will be at current market rates—likely higher than what you have now. Expect a 20%–25% increase for most borrowers by 2026.

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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 and upcoming renewal spikes, the pressure is building.

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

At Mortgage.Expert, we help Canadians make informed mortgage decisions. If you’re worried about payment shock, trigger rates, or rising monthly costs, let’s talk. We’ll help you navigate your next step with clarity and confidence.