In light of the fact that many consumers are attempting to deal with higher mortgage expenses following the Bank of Canada's unexpected rate hike last week, Canada's finance regulator is asking lenders to address risks surrounding mortgage extension at their "earliest opportunity."
OSFI - the Office of the Superintendent of Financial Institutions has expressed urgency, underscoring its concerns about the risk that is building up on Canadian institutions' books. Interest rates in Canada have reached a 22-year peak of 4.75%, and economists anticipate another 25 points rise next month.
Many large Canadian banks permit owners of variable interest rate mortgages to prolong their amortization time in order to maintain the same level of repayments, initially reducing the impact of increasing borrowing rates but subsequently exposing borrowers to more risks.
In addition to addressing negative amortization as soon as possible and taking into consideration the higher risk posed by such loans in loss provisioning, OSFI anticipates a more cautious and aggressive approach to account management.
As a result of our continued interactions with financial institutions, it is critical to handle all types of mortgage accounts pro-actively and to take action before borrower stress levels grow intolerably high.
The regulator had issued a warning in April, stating that while the temporary solution to lengthen the time between mortgage payments might benefit borrowers, it would also put them in debt for a longer period of time.
According to the housing agency CMHC, only 16.7% of borrowers chose a variable-rate mortgage, down from roughly half in early 2022, when they took advantages of the central bank's low rate of interest and discounts provided by lenders.
Mortgage debt and negative amortization happen as a result of the payment on the mortgage no longer covering the interest payment component as the interest rate increases.
As a consequence of variable-rate loans which have stopped amortizing, more than 20% of the mortgage portfolios held by the six big Canadian banks had repayment terms longer than 30 years within the first quarter, up from just 2% the year before, according to Desjardins analyst Royce Mendes.
In order to keep up with their original payment schedule, holders of variable-rate loans must make at least 30% more. Mendes observes that as a result, some individuals may decide to postpone repayments.
Yes, the amortization will undoubtedly be kept within the range of 30 years.
In May, Bank of Canada data revealed that, compared to February 2022, shortly before the Bank started hiking its policy interest rate, roughly one-third of mortgages had witnessed an increase in payments. The central bank estimates that almost all mortgage holders are going to experienced an increase in their payments.
Despite claims from major banks that only a few consumers are choosing to lengthen their mortgages, economists have cautioned that the difficulties will persist throughout the year.
We still see mortgage lending being a modest revenue disadvantage for Canadian banks, adding threat to the economy as loans renew at higher rates, putting pressure on disposable income, according to Mike Rizvanovic, the KBW analyst .
Additionally, in anticipation of additional defaults and a decline in the value of commercial real estate, Canada's largest banks have put aside more money to cover failed loans this quarter.
The possibility of further rate increases, Rizvanovic added, adds to the headwind and risks are still high.