Canada’s Financial Regulator Expresses Concern Over Rise in Ultra-Long Mortgages
Canada’s Superintendent of Financial Institutions, Peter Routledge, has voiced his apprehension over the prevalence of ultra-long mortgages in the country.
According to Routledge, Canadian banks currently hold approximately $250 billion of mortgages with an amortization period extending to 35 years or more. He posited that the financial institutions and borrowers alike would benefit if such loans were less common.
The Office of the Superintendent of Financial Institutions (OSFI) is reportedly in talks with lenders to tackle this issue, with plans to introduce more regulatory supervision to make these products less common. The OSFI initiated a consultation on residential mortgages in January, and they plan to release draft guidelines in October.
The Rising Interest Rates and Impact on Homeowners
For homeowners with variable-rate mortgages who have fixed monthly payments, they have witnessed a significant rise in their interest rates. This has resulted in many only making interest payments. They face the prospect of much higher payments when their loans come up for refinancing, especially if interest rates remain high.
Despite the concerns, Routledge described the problem as “manageable,” pointing out that the $250 billion figure has decreased from $280 billion earlier in the year. The OSFI has been questioning senior leaders at banks about their strategies to reduce this issue. Routledge also noted that negatively amortizing mortgages constitute a relatively small fraction of the total $2.1 trillion in Canadian residential mortgage debt that his organization monitors.
The Scenario of Inflation Despite Increased Interest Rates
Despite the Bank of Canada’s attempts to increase interest rates over the last 18 months, the inflation rates have not been significantly curbed. While the volume of housing sales has decreased, home prices have not dropped significantly. Under the regulator’s “stress test,” borrowers seeking uninsured loans must qualify at a rate two percentage points higher than the bank’s offered rate or 5.25 per cent, whichever is higher. This means homebuyers need to prove they can handle loans with interest rates above 7 per cent.
Propositions for More Stringent Home Buying Rules
During a discussion, Evan Siddall, Chief Executive Officer of Alberta Investment Management Co., suggested that the government should make it more difficult for Canadians to buy homes. He proposed increasing the minimum down payment to 10 per cent from 5 per cent and taxing capital gains on home sales, although he recognized such a move would be unpopular.
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