Big Six impaired loans hit $37.5 billion: what tripling distress signals for Canadian borrowers
The number that gets quoted when credit analysts brief investors is $37.5 billion. That is the total volume of gross impaired loans now sitting on the books of Canada's Big Six banks, a figure that has nearly tripled from the cyclical lows recorded in early 2022. The tripling sounds stark. It is also, in one important sense, exactly what would be expected when interest rates rise from emergency lows to restrictive territory in under 24 months.
An impaired loan is one where the borrower has missed payments for 90 days or more. The threshold is mechanical: reach day 91 and the loan moves from performing to impaired in the bank's regulatory filings. The increase is concentrated in two categories: commercial real estate and unsecured consumer credit. Residential mortgages, despite years of warnings about payment shock, remain a much smaller contributor to the impaired total than credit cards and lines of credit.
Why mortgages are holding while cards are not
Canadians are making a choice about which debts to service first. The mortgage gets paid. The Visa bill does not. This hierarchy shows up clearly in the data. Mortgage delinquencies, even among borrowers who have rolled off historically low pandemic-era fixed rates into renewal rates in the low 4% range, are tracking below historical averages. Credit card balances past due, by contrast, are climbing steadily.
The explanation is structural. A mortgage default threatens the roof. A credit card default threatens the credit score and triggers collection calls, but the consequences are slower and less binary. OSFI's mortgage stress test, which has required borrowers to qualify at a rate 150 basis points above contract since well before the current cycle, built a buffer into the system. That buffer is now doing what it was designed to do: keeping borrowers current even when the payment doubles at renewal.
Unsecured credit has no such test. A borrower approved for a $15,000 line of credit at 6.5% in 2021 is now carrying the same balance at 9.8%, with no reassessment of their ability to service it. When household cash flow tightens, that is the loan that goes unpaid.
The commercial real estate lag
Office-space valuations are dragging out the credit pressure on a different timeline. Commercial loans do not default quickly. A lease signed in 2021 for a downtown Calgary tower might not expire until 2028. The tenant renews at a lower rate, or does not renew at all, and the building's cash flow falls short of what the lender modelled when the mortgage was written. The loan becomes impaired 18 months later when the borrower has exhausted reserves and missed three consecutive payments.
This is why the $37.5 billion figure will likely continue rising even if the Bank of Canada eases further. The commercial stress that began when rates crossed 5% in mid-2023 is only now reaching the 90-day threshold.
What manageable actually means
Morningstar DBRS describes the situation as manageable for the institutions, and the capital ratios support that characterization. The Big Six are carrying Common Equity Tier 1 ratios well above the 13.5% regulatory floor set by OSFI, and provisions for credit losses have been climbing for two years to absorb exactly this kind of deterioration. The banks can handle $37.5 billion in impaired loans without threatening their stability.
A tripling of impaired loans is a tripling of Canadians who could not make a payment for three months running. The people in default are not holding.
The number that gets quoted when credit analysts brief investors is $37.5 billion. That is the total volume of gross impaired loans now sitting on the books of Canada's Big Six banks, a figure that has nearly tripled from the cyclical lows recorded in early 2022. The tripling sounds stark. It is also, in one important sense, exactly what would be expected when interest rates rise from emergency lows to restrictive territory in under 24 months.
An impaired loan is one where the borrower has missed payments for 90 days or more. The threshold is mechanical: reach day 91 and the loan moves from performing to impaired in the bank's regulatory filings. The increase is concentrated in two categories: commercial real estate and unsecured consumer credit. Residential mortgages, despite years of warnings about payment shock, remain a much smaller contributor to the impaired total than credit cards and lines of credit.
Why mortgages are holding while cards are not
Canadians are making a choice about which debts to service first. The mortgage gets paid. The Visa bill does not. This hierarchy shows up clearly in the data. Mortgage delinquencies, even among borrowers who have rolled off historically low pandemic-era fixed rates into renewal rates in the low 4% range, are tracking below historical averages. Credit card balances past due, by contrast, are climbing steadily.
The explanation is structural. A mortgage default threatens the roof. A credit card default threatens the credit score and triggers collection calls, but the consequences are slower and less binary. OSFI's mortgage stress test, which has required borrowers to qualify at a rate 150 basis points above contract since well before the current cycle, built a buffer into the system. That buffer is now doing what it was designed to do: keeping borrowers current even when the payment doubles at renewal.
Unsecured credit has no such test. A borrower approved for a $15,000 line of credit at 6.5% in 2021 is now carrying the same balance at 9.8%, with no reassessment of their ability to service it. When household cash flow tightens, that is the loan that goes unpaid.
The commercial real estate lag
Office-space valuations are dragging out the credit pressure on a different timeline. Commercial loans do not default quickly. A lease signed in 2021 for a downtown Calgary tower might not expire until 2028. The tenant renews at a lower rate, or does not renew at all, and the building's cash flow falls short of what the lender modelled when the mortgage was written. The loan becomes impaired 18 months later when the borrower has exhausted reserves and missed three consecutive payments.
This is why the $37.5 billion figure will likely continue rising even if the Bank of Canada eases further. The commercial stress that began when rates crossed 5% in mid-2023 is only now reaching the 90-day threshold.
What manageable actually means
Morningstar DBRS describes the situation as manageable for the institutions, and the capital ratios support that characterization. The Big Six are carrying Common Equity Tier 1 ratios well above the 13.5% regulatory floor set by OSFI, and provisions for credit losses have been climbing for two years to absorb exactly this kind of deterioration. The banks can handle $37.5 billion in impaired loans without threatening their stability.
A tripling of impaired loans is a tripling of Canadians who could not make a payment for three months running. The people in default are not holding.
Sources
Read Next
Home Prices in 2027 Hinge on a Handoff From Population to Business Investment
Bank Rate Hikes Lift Your Qualifying Rate: 3 Moves on Term and Rate Shopping
Steady Policy Rate, Rising Fixed Rates: Reading the Gap Before You Lock In
The 39% Limit: How the Stress Test Sets Your Real Buying Power