Annual Risk Outlook – Semi-annual update – Fiscal Year 2025-2026

Introduction

Canadian financial institutions continue to navigate a challenging risk environment and face uncertainty related to trade and tariffs. Nevertheless, OSFI judges the resilience in the system as sufficient to absorb the potential materialization of key risks.

In March, our Annual Risk Outlook (ARO) highlighted 4 key risks:

Since the release of the 2025 ARO, risks to the Canadian economy have evolved with the escalation of tariff discussions, rising unemployment and continued housing market pressure. Despite this transition, Canadian financial institutions remain well positioned to navigate the risk environment. Institutions continue to demonstrate strong financial resilience and downturn preparedness.

The uncertainty of tariff negotiations has reduced the activity of lenders, borrowers, consumers, and suppliers as they await resolution. The threat of rising costs for key economic inputs and the potential for higher unemployment levels reduce confidence and inhibit investment. A deteriorating economic environment will lead to reduced cashflows and weaker asset valuations.

The housing market in Canada faced strains prior to the April trade tensions and continues to show signs of weakness. Softening economic conditions will cause more strains over the coming year. The condo market in Canada, especially in the GTA and GVA regions, is under pressure and has deteriorated further since the issue was highlighted in the spring ARO.

Implications of Tariff Uncertainty

Uncertainty about the severity of trade tensions peaked in April then receded partially. Markets have, so far, adjusted well to this operating environment. Although capital markets have discounted negative outcomes, a potential shock due to unexpected, volatile events could hit consumers and business more severely than what has been discounted. The lack of clarity on tariffs is generating unease amongst consumers and businesses facing an outlook highly sensitive to the outcomes of the on-going negotiations.

Canada's economy may be negatively impacted by this more restrictive operating environment for global trade. With a weakened economic environment, further downward pressure on the housing market, business investment, and consumer confidence can be expected. This environment will likely have a negative effect on borrowers and collateral values, ultimately leading to increased credit risk for Canadian financial institutions.

Housing Market and the Retail Lending Landscape

Transaction activity in the Canadian housing market remains below 10-year averages. Moreover, house prices continue to decline as housing markets in certain geographies experience elevated levels of available-for-sale listings.

Household credit delinquencies continue to increase, albeit from historically low levels, as borrowers navigate a weakening economy and contend with higher debt-service payments. Delinquency rates are returning to levels observed pre-COVID.

We observe higher delinquencies in variable rate fixed payment mortgages (VRMFPs) as well as in business for self and investor mortgages portfolios. Delinquency levels in Toronto continue to surpass delinquencies in other major centres.

Within the housing market, the condo segment exhibits the greatest weakness, particularly new, multi-unit construction where prices are declining as supply increases. Further declines in condo prices could negatively impact investor mortgages, drive down collateral values, and reduce investor appetite for new multi-family construction projects. This will have a direct impact on jobs supporting the housing construction sector and contribute to economic strain.

RESL maturity concerns have lessened as renewal rates will likely be lower than those faced in 2024, given the seven Bank of Canada rate cuts since June 2024. A subset of borrowers will still experience significant payment increases. As of May 2025, 31% of all outstanding mortgages (on a count basis) are fixed rate mortgages and VRMFPs renewing by the end of 2027, which were originated when rates were at historic lows (pre-March 2022).

OSFI Response

In response to challenges in the housing market, OSFI continues to assess adherence to Guideline B20's principles on prudent underwriting standards, portfolio management, and account management practices. We are closely examining adherence to the newly implemented loan-to-income measure and assessing mortgage lenders' VRMFP risk management practices.

To specifically address concerns regarding changes in property values, on July 17, 2025, OSFI posted a backgrounder on blanket appraisals and appraisal timing. This reinforced our expectations that mortgage lenders establish policies ensuring timely, realistic, and substantiated valuations, in accordance with Guideline B-20, to accurately reflect a property's current value.

We are also conducting heightened monitoring to ensure institutions are prepared for scenarios that could impact liquidity. Supervisory work includes assessing liquidity management at material foreign operations. Industry consultations were recently concluded on revisions to the Liquidity Adequacy Requirements Guideline, and a proposed Internal Liquidity Adequacy Assessment Process. Consultation feedback will be incorporated into further liquidity risk guideline updates and consultations through 2026.

Given our concerns about unexpected economic outcomes, and the potential for broad financial market strain due to continued uncertainty, we are focused on institutional preparedness for stress events. Additionally, we are prepared to take measures where appropriate to alleviate constraints on institutions and ensure that the Canadian financial system can leverage its built-up financial resilience in a time of need.

For information on our planned guidance priorities for calendar quarters Q3 2025 to Q1 2026, please visit OSFI's policy releases and announcements schedule.