Rising Delinquencies Test Canada’s Mid-Size Mortgage Lenders

Toronto | October 28, 2025, 10:30 IST — Filed via Morningstar DBRS Report

Canada’s mortgage market is coming under fresh scrutiny after a new Morningstar DBRS report highlighted a sharp rise in delinquencies at some of the country’s mid-sized lenders. While the “Big Six” banks continue to show resilience, smaller players that cater to near-prime and non-prime borrowers are feeling the strain.

Delinquencies on the Rise

The report shows that Fairstone Bank of Canada, which serves a wide swath of near-prime clients, saw its mortgage impairment ratio rise to 2.2% in Q2 2025, compared to just 0.3% at the end of 2022. Similarly, Equitable Bank, another growing player in the alternative lending space, has also witnessed rising late payments.

Morningstar DBRS analysts noted that higher interest rates, inflation pressures, and stagnant wage growth are pushing financially stretched households to the brink. While most prime borrowers remain current on payments, near-prime segments are clearly under stress.

Why Smaller Lenders Are More Exposed

Unlike the Big Six banks, mid-size and challenger banks tend to rely heavily on risk-based pricing, securitization markets, and niche borrower pools. These models work well in stable economic environments but become vulnerable when household finances tighten.

For example, many borrowers in the near-prime segment are self-employed, gig workers, or those with limited credit histories. They are often the first to feel pressure when debt-servicing costs rise. Mortgage renewals at today’s elevated rates—averaging above 4.5% for insured mortgages and 6%+ for posted rates—are amplifying the challenge.

Implications for Borrowers

For Canadians seeking a mortgage outside the traditional big banks, the landscape is likely to become more difficult:

• Stricter qualification criteria: Lenders may tighten underwriting standards to manage risk.
• Higher spreads: Alternative lenders could increase interest rate spreads to offset rising credit costs.
• Fewer options for the near-prime borrower: Self-employed individuals or those with past credit blemishes may find fewer approvals, or may face larger down-payment requirements.

This could push some borrowers into delaying homeownership plans or extending rental tenures until conditions ease.

Implications for Markets

From an industry standpoint, the rise in delinquencies may have ripple effects:

• Credit risk premiums in the securitization market could rise, leading to costlier funding for non-bank lenders.
• Investor sentiment may turn cautious towards lenders with higher exposure to non-prime books.
• Regulatory attention could increase, especially if impairment ratios rise further across the sector.

While the overall system remains stable, analysts caution that stress in the smaller end of the lending market often acts as an early warning signal.

The Bigger Picture

Canada’s household debt remains among the highest in the G7, with mortgage debt making up nearly three-quarters of total liabilities. Even modest increases in delinquency ratios can put pressure on the ecosystem. With many mortgages set for renewal in late 2025 and 2026, the risk of payment shock looms large for households that locked in at ultra-low rates during 2020–21.

For policymakers, the balancing act continues: maintain financial stability while ensuring access to credit for Canadians who don’t fit the “prime” box.

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Bottom Line
Rising delinquencies at mid-size lenders are a reminder that not all parts of the mortgage market are equally resilient. For borrowers, it means more scrutiny and potentially higher costs. For the market, it signals an early crack in Canada’s housing finance foundation—one that regulators, lenders, and households will be watching closely.