Canadian banks and regulators should take a hard look at mortgages that have allowed some households to run up large amounts of long-term debt as interest rates went up, the Bank of Canada’s no. 2 official said.

Carolyn Rogers, the Bank of Canada’s senior deputy governor, said in an interview that the number of so-called “negative amortization” mortgages is a concern. The loans have that label because they allow the borrowers to pay fixed payments, even as interest rates rise.  

In the short term, that reduces the shock of higher borrowing costs. But the flip side is the amortization period — the time it takes to pay off the loan — is extended by years or even decades. Rates have gone up so quickly that there are now more than $200 billion (US$146 billion) in mortgages in Canada with very long amortization periods; many borrowers are paying little to no principal on them. 

“I think that product needs a close look and I think it’ll get a close look,” Rogers told Bloomberg News, shortly after she attended a meeting with senior bank executives in Toronto on Friday. “I think you’ll see the industry reflect on how much they want to offer that product.”

 “It is concerning. You don’t want a big portfolio of negative amortizing mortgages,” she said. “It’s not good for the banks and it’s not good for the mortgage holders. But our understanding is there’s a pretty concerted effort to try and resolve these” before borrowers hit the renewal date on those loans.

It’s rare for a senior Bank of Canada official to weigh in on a specific financial product. Prudential regulation of banks and insurance companies in Canada rests not with the central bank but with the Office of the Superintendent of Financial Institutions — where Rogers worked during a long career in financial regulation before she joined the Bank of Canada nearly two years ago. 

Her comments also highlight mounting downside risks to the Canadian economy and the financial system, as the country’s highly indebted households renew their shorter-duration mortgages — a consequence of the bank’s forceful campaign to tighten policy and rein in inflation.

Restoring price stability remains the central bank’s focus, and despite delays, Rogers says the central bank is seeing monetary policy “really starting to take hold.” 

The Bank of Canada’s mandate is to deliver 2 per cent inflation, operating within a control bank of 1 per cent to 3 per cent. Inflation has been above that range for 29 of the past 30 months. 

Slowing core inflation is the primary requirement needed for policymakers to consider lowering rates, Rogers said, adding that officials are likely to keep alive the threat of additional hikes until they’re seeing significant progress toward the target.

“A rate hike is on the table until we are really confident that we are clearly on our way,” Rogers said. 

Asked what would prompt another rate hike, Rogers pointed to stickier-than-expected price pressures and excess demand — the same factors that prompted policymakers to move from the sidelines and boost rates again in June and July.

“Those types of surprises, those are the kinds of things that I think would make us reflect,” Rogers said. 

Rogers, the first non-economist to hold the senior deputy governor position in the modern era, joined the bank in December 2021, when the overnight lending rate was at emergency levels of 0.25 per cent and before inflation in Canada started rapidly rising. 

Rogers and Governor Tiff Macklem launched one of the most aggressive interest hiking cycles in the history of the central bank in March 2022, bringing the policy rate to 5 per cent in little more than a year and half.

Still, price pressures remain stubbornly elevated in Canada. The central bank has pushed back its expected return to the 2 per cent target to the latter half of 2025. 

At the same time, there is growing evidence the economy is weakening, allowing policymakers to pause rate hikes in September and October. On Friday, Canada posted a small gain in jobs and unemployment rate rose to a 21-month high of 5.7 per cent. Preliminary data has also signaled the possibility of a technical recession, or two straight quarters of economic contraction.