Canada's banking regulator says real estate secured lending and mortgages are among the top risks facing the country's financial system as higher interest rates put pressure on borrowers.

In its annual risk outlook, the Office of the Superintendent of Financial Institutions says as homeowners renew their mortgages, they could potentially face a payment shock due to higher interest rates compared with when they last secured their loans.

The regulator says it expects the payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or default.

Other top risks identified by OSFI include wholesale credit risk, including risk from commercial real estate lending as well as corporate and commercial debt, and funding and liquidity risks.

It also pointed to risks associated with social and political conflict.

OSFI says a major geopolitical event could disrupt markets and create instability for institutions, while the escalation of political tensions and the polarizing effect of geopolitical issues have the potential to make Canadian institutions a target for politically motivated attacks.

This report by The Canadian Press was first published May 22, 2024.