Fitch Warns Canada of Credit Downgrade—That’s Bad News For Mortgages

Canada’s latest budget could cost households more than just higher taxes. Fitch Ratings warns Canada’s sovereign credit rating is at risk of a downgrade, citing persistently large deficits and no credible path back to fiscal normalcy. A downgrade would act as a red flag for investors—eroding confidence and raising borrowing costs across the economy, from governments to households—including mortgages.

Sovereign Credit Ratings

Sovereign credit ratings assess a country’s ability to repay debt, guiding investors on risk. They’re based on fiscal, economic, and political factors—anything that could jeopardize repayment, from delayed payments to outright default. 

Countries are graded on a scale from AAA (highest) to D (default). A higher rating shows lower risk, which attracts investors and lowers borrowing costs. Downgrades indicate higher risk, driving up borrowing costs. 

Credit ratings also have a cascading effect. When a sovereign rating falls, borrowing costs rise across the system—from provinces and municipalities to businesses and households. When a country is seen as risky, so is the currency it issues—and everything priced in that currency, including labour.

Canada Faces A Downgrade From Fitch, No Path Back To Normal

Fitch affirmed Canada’s credit rating in July at AA+, meaning it’s strong—but not top-tier. That may soon change, according to the latest note, which flags that “fiscal policy remains expansionary,” even as revenue improves. In other words, Ottawa is collecting more but spending at an even faster pace. 

Fitch outlined three core concerns: 

1. A deficit of 1.2% of GDP—double the pre-pandemic average.
2. Gross general government debt is projected to hit 111% of GDP by 2026, far above the AA+ median of 45%. 
3. No path back to fiscal normalcy. 

The third point is the dealbreaker. Temporary borrowing during crises is expected. However, when deficits persist and spending forecasts continue to rise without a return to balance, agencies begin to view it as structural. 

“Canada lacks a clear fiscal anchor, and the general government fiscal stance remains expansionary in 2025,” warns the report from Fitch.

Canada has relied on a crisis-like budget throughout the 2020s, with the latest budget projecting a bleak future. Either Canada is less stable than it presents, or policymakers are leaning too heavily on a crisis narrative for a shopping spree. 

Canada’s Costs Would Rise With Downgrade—Including Your Mortgage

A downgrade from AA+ to AA wouldn’t be a catastrophe, but it can be the start of one—a catas, if you will. The impact depends on investor reaction, but similar downgrades typically raise government borrowing costs by 5 to 25 basis points (bps), especially on long-term debt. For Canada’s $1.3 trillion gross federal debt, a 20 bps increase adds $2.6 billion in annual interest—roughly the size of the City of Vancouver’s entire budget. 

The effect doesn’t stop at Ottawa. Government of Canada bonds act as a benchmark across the country. As federal yields rise, so do borrowing costs for provinces, municipalities, businesses, and households. That includes fixed-term mortgages, which move with bond yields. 

Investor confidence is already shaky. Demand for Canadian-dollar assets has weakened, and capital outflows have pushed yields higher. A downgrade would only deepen those challenges—making it even harder to attract capital.