Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is set to implement new guidelines for the mortgage market in an effort to reduce the risks posed by negative amortization mortgages. These types of loans have become increasingly prevalent in Canada, with approximately one in five home loans at three major Canadian banks now negatively amortizing. Negative amortization occurs when monthly payments are no longer enough to cover anything but the interest, resulting in the addition of years or even decades to the payment term of the loan.
The new guidelines, expected to be unveiled this month, will include changes aimed at reining in the surge of negative amortized loans. The issue has become more pronounced due to the large and rapid increase in interest rates over the past year and a half. Borrowers like Michael Girard-Courty, who bought a duplex in Joliette, Quebec, have seen their mortgage terms balloon from 25 years to 47 years due to the increased allocation of their payments towards interest rather than paying down the principal.
Negative amortization loans make up a significant portion of the mortgages held by major Canadian banks, with approximately $130 billion of housing debt in this category. With about 100,000 mortgages coming up for renewal in Canada each month, the number of negative amortization loans is likely to increase. This has raised concern among experts like mortgage broker Patrick Betu, who believes that rules allowing for so many negative amortization loans need to be updated.
Some lenders have implemented measures to limit the possibility of negative amortizations, such as requiring lump sum payments or switching borrowers to fixed-rate loans with higher but steady payments. Royal Bank and Scotiabank, in particular, do not originate mortgage products that result in negative amortization. However, other major banks continue to have a significant number of mortgages in negative amortization territory.
OSFI head Peter Routledge acknowledges the risk that these loans present to the financial system and believes they should be less prevalent. While he downplays the extent of the problem, noting that approximately $250 billion worth of mortgages in Canada are currently amortized for 35 years or longer, he recognizes the need for regulatory oversight to address the issue. The forthcoming guidelines from OSFI will address this concern and provide more regulatory oversight to make negative amortization loans less prevalent in the market.
In conclusion, the implementation of new guidelines by OSFI aims to reduce the risks associated with negative amortization mortgages in Canada. The increasing prevalence of these loans, combined with the large and rapid increase in interest rates, has led to a surge in the number of mortgages that are no longer amortizing as originally planned. OSFI aims to address this issue and lower the risk these loans pose to the financial system.