(Bloomberg) — Canada’s main banking regulator flagged elevated borrowing costs as a growing risk to the country’s financial system, as housing and commercial real estate remain top vulnerabilities.

The Office of the Superintendent of Financial Institutions said higher interest rates are pressuring retail, corporate and commercial borrowers when it comes to their ability to service debt, according to a report released Thursday. It also sees signs that credit quality is deteriorating, especially in the commercial real estate sector.

“As the impact of higher rates continues to be absorbed, the ability of consumers and businesses to adapt to the current rate environment will be tested as loans mature over the next few years,” OSFI said. 

For consumers, higher borrowing costs create mortgage challenges. Home prices in Canada rose steadily for years with few price corrections, then surged during the Covid pandemic when interest rates dropped to rock-bottom levels. Though the market slumped last year, the national benchmark home price has still doubled in the past decade, to C$757,600 ($553,437) as of August. There’s also uncertainty about the long-term value of commercial properties, as remote and hybrid work arrangements persist.

“While office, and construction and development are the riskiest CRE segments, all commercial property types are facing increased risks due to higher interest rates,” OSFI said. “We have observed a deterioration in the credit quality of variable-rate, fixed payment mortgages.”

Many Canadian borrowers hold variable-rate loans that move up and down with the Bank of Canada’s policy rate. The cost of fixed-rate mortgages has also jumped alongside government bond yields. 

Canadian lenders have about C$250 billion ($184 billion) of mortgages with reported amortization periods of 35 years or longer, Peter Routledge, the superintendent of financial institutions, said during a news conference in September. Some of those mortgages are actually “negatively amortizing” — meaning the borrower’s balance is actually rising. 

Some of those borrowers will be forced into much higher payments when their mortgages renew. OSFI is asking senior leaders at commercial banks what they’re doing to “shrink this problem,” Routledge said.  

Read More: Canada’s Bank Watchdog Wants to Rein In Ultra-Long Mortgages

—With assistance from Christine Dobby.