Canada's mortgage arrears rate climbed to 0.24% in August 2025, the highest level since September 2020. That's up one basis point from July and four basis points higher than a year ago, representing 20% growth in arrears relative to total mortgages.

But the arrears rate isn't the biggest concern. What's flying under the radar is an unprecedented contraction in total mortgage volumes at Canadian banks. Member banks held 4.94 million mortgages in August, down 1.7% from a year ago. That's the lowest level since October 2020.

Year-over-year growth has remained negative since April 2023, marking the first sustained contraction since records began in 1995. When you pair rising arrears with a shrinking mortgage base, you're looking at a shift from household stress to market-level liquidity risk.

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Arrears Are Climbing Faster Than in the 1990s

The current climb in arrears has persisted for 35 months, rising from 0.14% in mid-2022 to 0.24% in August 2025. That's a 20.3% compound annual growth rate, over 10% faster than the climb that occurred in the 1990s.

Canada's last major housing correction happened shortly after the mortgage arrears rate fell to a record low of 0.18% in 1989. Over the next 91 months, the rate climbed to 0.65%, an 18.4% compound annual growth rate.

If the current trend continues for the same length, the arrears rate would hit 0.57%, matching the 1996 level. That may seem absurd, but prominent economists are warning that this correction will persist for years.

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The Big Six Banks Are Worse Than the National Average

Despite Canada's Big Six banks representing the majority of loans, five of the six now have residential mortgage arrears higher than the national average.

BMO leads at 37 basis points, sitting 14 basis points higher than the national average. It's followed by CIBC at 36 basis points, RBC at 31 basis points, National Bank at 27 basis points, and Scotiabank at 24 basis points. The only Big Six to outperform the average was TD with an arrears rate of just 13 basis points.

Canada's Big Six tend to lead the market in terms of quality. They almost have a monopoly on higher income households with stable income and high credit scores. The fact that they're leading in arrears, arrears growth, or both, is an unusual development that implies elevated risk.

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CIBC's Benjamin Tal Warns of 2026 Payment Shocks

CIBC Deputy Chief Economist Benjamin Tal flagged early credit pressures in a recent report, noting that while arrears remain low by historical standards, the latest signs point to a turn in household credit conditions, most visibly among renters, subprime borrowers, and homeowners with other debts.

Tal expects the real test to arrive in the second half of 2026, when the share of borrowers facing mortgage payment increases of more than 40% could reach 5% to 6% of the market, more than double today's share.

"The message here is that some pressure on mortgage delinquencies is likely to persist and, in fact, might intensify, mostly in the second half of 2026," he writes.

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The Mortgage Contraction Is Unprecedented

Here's what makes the current situation different from past cycles. Mortgages held by Canadian Bankers Association members peaked at 5.12 million in June 2022 and have since fallen 3.5%. That's the lowest level since October 2020.

Prior to April 2023, going all the way back to the mid-1990s, there were only seven months in 2018 and 2019 where annual growth declined. Now we've had sustained negative growth for over two years.

This isn't just a pause in new mortgage activity. It's an actual contraction in the total number of mortgages held by banks. Mortgages are being paid off, discharged, or written off faster than new mortgages are being originated.

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What a Shrinking Mortgage Base Means

Rising arrears alone might not warrant much attention. Arrears rates are still historically low compared to the U.S. or UK. More than 99% of Canadian mortgage holders remain current on their payments.

But when arrears are rising while the mortgage base is shrinking, the dynamics change. Arrears are backward-looking. They rise when owners can't sell fast enough to avoid default. Fewer new mortgages means fewer buyers, tighter liquidity, and a growing risk that the market can't absorb distress without triggering deeper losses.

Think about it this way. If 100,000 homeowners need to sell due to financial stress, and there are 5 million active buyers in the market, that distress can be absorbed relatively easily. But if there are only 4.9 million buyers and the number is shrinking, those 100,000 homes flood a smaller pool of potential purchasers.

That creates downward pressure on prices. Which creates more homeowners underwater on their mortgages. Which creates more financial stress. Which leads to more distressed sales. The feedback loop intensifies.

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Regional Variation Tells Different Stories

Saskatchewan continues to have the highest arrears rate at 0.54%, followed by Manitoba at 0.33% and Alberta at 0.26%. Ontario and British Columbia reported arrears of 0.22% and 0.21% respectively, while Quebec remained below the national average at 0.18%.

The regional pattern suggests arrears track local employment conditions more than national trends. Saskatchewan's resource-dependent economy has faced more volatility. Manitoba's property tax surge and infrastructure cost pressures are hitting homeowners harder. Alberta's insurance spike is creating additional strain.

Ontario and BC, despite having the most expensive housing markets, actually have lower arrears rates than Prairie provinces. That's because homeowners in those markets tend to have higher incomes, larger down payments, and more equity cushion.

But that could change. Toronto's condo market is in free fall. Vancouver's pre-construction market has collapsed. And both cities saw housing starts drop dramatically in October. If employment weakens in those markets, arrears could climb quickly.

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What This Means for Real Estate Markets

A shrinking mortgage base signals tightening liquidity. There are fewer buyers financing purchases with mortgages, which means demand is contracting even as interest rates fall.

For sellers, this creates a challenging environment. Fewer active buyers means longer time on market, more price negotiations, and greater risk that your home won't sell at your target price.

For buyers with financing secured, it creates opportunity. Less competition from other buyers means more negotiating leverage and potentially better pricing.

For investors holding rental properties, the combination of rising arrears and shrinking mortgage activity suggests growing financial stress among homeowners. That stress could translate to more supply hitting the market, which would put downward pressure on both sale prices and rental rates.

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How Coldwell Banker Horizon Realty Can Help

At Coldwell Banker Horizon Realty, we understand that mortgage arrears trends and liquidity conditions affect real estate markets in complex ways. Whether you're evaluating whether to sell before market conditions deteriorate further, wondering if now is the right time to buy while competition is lower, or assessing how these trends affect your local market, we provide the expertise and insights you need.

Understanding the relationship between arrears, mortgage contraction, and market liquidity requires professional guidance from people who track these indicators and understand their implications.

Contact Coldwell Banker Horizon Realty today to discuss how current mortgage trends are affecting your area and how we can help you make informed real estate decisions in this evolving market environment.

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The Bottom Line

Canadian mortgage arrears hit 0.24% in August 2025, the highest level in nearly four years. But the bigger story is the unprecedented contraction in total mortgages held by banks, down 1.7% year-over-year and 3.5% from the June 2022 peak.

This is the first sustained mortgage contraction since records began in 1995. Rising arrears combined with a shrinking mortgage base signals a shift from household stress to market-level liquidity risk.

CIBC's Benjamin Tal warns that the real test comes in the second half of 2026, when 5% to 6% of borrowers could face mortgage payment increases of more than 40%. That's more than double today's share and could push arrears significantly higher.

The Big Six banks, historically known for lower-risk portfolios, now have arrears rates above the national average in most cases. That suggests the stress is concentrated among recent buyers, many of whom purchased at peak prices with minimal down payments and are now facing payment shocks at renewal.

A shrinking mortgage base means fewer buyers are entering the market. That reduces liquidity, makes it harder to sell properties quickly, and increases the risk that distressed sales will pressure prices lower.

The arrears rate is still low by historical standards. More than 99% of Canadian mortgage holders remain current. But the velocity of change, arrears climbing 71% in under three years, suggests the trend is far from over. And with total mortgages contracting for the first time in decades, the market's ability to absorb distress is weakening exactly when it might be needed most.