Mortgage Defaults Jump in Canada: Are Investors or Homeowners Feeling the Heat?

Canada’s housing market may be calm on the surface, but there are strong undercurrents stirring. According to the Bank of Canada’s latest Financial Stability Report, mortgage delinquencies jumped significantly in the first quarter of 2025. While officials insist the situation isn’t yet alarming, the real question is: who’s falling behind—families trying to keep their homes, or investors who bought too much, too fast?

Failing to pinpoint where the risk is concentrated could leave taxpayers unknowingly footing the bill for investors who took on more than they could handle, all under the guise of protecting the broader market.

Mortgage Impairments Up 65% From Lows at Major Banks

Canada’s biggest banks are seeing a fast rise in mortgage impairments. The rate hit 0.43% in Q1 2025—a jump of 4 basis points in just one quarter, and 17 basis points higher than the low point in 2022. That may not sound like much, but the volume of impaired loans has surged 10% this quarter alone, and is now 65% above its previous low.

At a glance, 0.43% resembles the “normal” levels seen pre-pandemic, like in 2019. But that comparison is misleading—those impairments are climbing while the economy is still relatively stable. The concern is, if we enter a period of global trade friction or further economic slowdown, this trend could accelerate much faster.

The Bank of Canada’s Narrow Lens Could Be Hiding Broader Risks

In its latest report, the BoC focused heavily on the stability of Canada’s largest banks, which dominate the lending space. It acknowledged that mid-sized lenders are seeing higher default rates but brushed it off because these institutions only hold $150 billion in mortgage exposure compared to the major banks’ $4.3 trillion.

However, this dismissal may be premature. These mid-tier lenders are steadily growing their share of the market. If their impairment rates—estimated to be near 2%—were factored in, Canada’s overall mortgage impairment rate could easily reach 0.5%. That’s not far off from levels seen after the Global Financial Crisis in 2012, when these lenders were much less prominent.

What’s more, these banks often serve higher-risk borrowers, many of whom were originally turned away by the big banks. While this risk seems contained on paper, it doesn’t disappear from the system—it just shifts. Canada’s unique mortgage structure, where long amortizations outlast short-term financing contracts, can obscure where the real risk lies.

Mortgage Defaults: A Sign of Investor Overreach, Not Homeowner Strain

It’s important to remember that mortgage defaults aren’t like missed phone or car payments. People usually do everything they can to keep paying their mortgage. Lenders offer refinancing options, longer amortization, or even equity takeouts before things hit a crisis point.

Even if those options fail, Canadian homeowners often have an escape route: sell the property. Thanks to the massive home price appreciation in recent years, many owners can still walk away with a profit. The ones who can’t? Typically, they’re recent buyers who had little equity to begin with—and this is where investors start to stand out.

A growing body of data suggests investors are driving much of the recent rise in mortgage delinquencies. The signs are hard to miss:

• Appraisals based on sale price rather than actual market value have become common, especially for pre-construction condos—a favourite among investors. Many of these units are now worth less than the mortgage, putting sellers in a bind.

• 30-year amortizations were introduced to help first-time buyers but are now widely accessible to investors, allowing them to stretch leverage further.

• CMHC insurance limits were quietly raised to $1.5 million, a move that may help fewer first-time buyers than over-leveraged investors looking to insure riskier, high-value purchases.

If this sounds familiar, it should. In the U.S. housing crash of 2008, many assumed subprime lending to low-income families was the root cause. But post-crisis research revealed something else: multi-property investors with good credit were responsible for much of the fallout. They used subprime lenders to maximize leverage, and when the market turned, they defaulted—leaving taxpayers to clean up the mess.

Final Thought: Know Where the Cracks Are Forming

Canada’s mortgage market may not be in crisis mode yet, but the trend lines are troubling. While the BoC insists there’s no systemic risk, the growing reliance on smaller lenders and investor-led borrowing suggests we could be facing a more fragile market than headlines imply.

Understanding who is at risk is crucial. If it’s families struggling to make ends meet, policy support may be warranted. But if it’s over-leveraged investors losing bets on risky condos, the conversation changes—and so should the response.