NTIOF - Canadian regulator warns banks on extending mortgages after rate hike

2023-06-14 07:39:24 ET

Canada's financial regulator is urging the country's lenders to address risks associated with mortgage extensions as soon as they can as many borrowers try to deal with higher mortgage costs after the Bank of Canada unexpectedly increased its policy rate last week, Reuters reported.

With the central bank's rate increase to 4.75% , a 22-year high, the Office of the Superintendent of Financial Institutions is concerned that Canadian banks are taking on more risk by allowing holders of variable rate mortgages to extend their amortization period to keep their repaymsnts at the same level, Reuters said. That blunts the effect of higher borrowing rates in the near term, but boosts borrowers' risk later on.

"OSFI expects a more prudent and active account management approach, including resolving negative amortization at the earliest opportunitiy as well as recognizing the higher risk of these loans in loss provisioning," the regulator said in a statement to Reuters.

About half of Canadian borrowers opted for a variable mortgage in early 2022 when the interest rate was low and lenders offered discounts. By January of 2023, only 16.7% of borrowers went with a variable-rate mortgage, according to Canada's housing agency CMHC.

Negative amortization occurs when the mortgage payment fails to cover the interest payment portion of the loan, leading to an increase on the balance of the mortgage.

At the big six Canadian banks, more than 20% of their mortgage portfolio had repayments greater than 30 years in Q1 as a result of variable-rate loans becoming non-amortizing, Desjardins analyst Royce Mendes told Reuters. That's up from ~2% of mortgage portfolios a year ago, he added.

The big Canadian banks are: TD Bank Group ( NYSE: TD ), Royal Bank of Canada ( NYSE: RY ), Bank of Montreal ( NYSE: BMO ), CIBC ( NYSE: CM ), Bank of Nova Scotia ( NYSE: BNS ), National Bank of Canada ( OTCPK:NTIOF ).

More on Canadian Banks:

• Big Banks Have Massive Exposure: A Look at Canadian Banks
• Canadian Banks: Perpetual Stalemate Offers Opportunity Through Mean Reversion Strategy
• TD Bank to build on its strength in U.S. core deposits, CFO says

For further details see: