Borrowers drastically extending mortgage amortizations
Canada’s banking regulator said he’s concerned about the prevalence of ultra-long mortgages and that his agency is working with lenders to stem the ubiquity of such loans.
The country’s banks have about $250 billion (US$185 billion) of mortgages with amortization periods — the length of time permitted to pay off the loan — that sit at 35 years or longer, according to Peter Routledge, the superintendent of financial institutions.
“I think both banks — financial institutions — and borrowers would be better off if the prevalence of this product was less, and we’re consulting and will have something out in October to discuss how we might address that, and put in place a little more regulatory oversight to make this product a little less prevalent,” Routledge, who heads the Office of the Superintendent of Financial Institutions, told reporters in Toronto on Tuesday.
OSFI began a consultation on residential mortgages in January and Routledge said it will release draft guidelines next month. Canadian bank shares extended declines on Tuesday after his comments, with the S&P/TSX Commercial Banks Index dropping as much as 1.3 per cent Tuesday to its lowest intraday level in a month.
Homeowners with variable-rate mortgages who have fixed monthly payments have seen the portion of their monthly payment that covers interest skyrocket as rates rise, and in many cases are now making only interest payments. When those loans come up for refinancing in coming years, they face the prospect of much higher payments should interest rates remain high.
The problem is “manageable,” Routledge said, noting that the $250 billion figure has declined from $280 billion earlier this year, with OSFI asking senior leaders at the banks what they are doing to “shrink this problem.”
Routledge, who spoke earlier at the Global Risk Institute Summit, also pointed out that negatively amortizing mortgages are a relatively small portion of the total $2.1 trillion in Canadian residential mortgage debt that his organization monitors.
The Bank of Canada’s campaign to hike interest rates over the past year and a half hasn’t substantially tamed inflation. While housing sales volume has dropped, home prices haven’t come down significantly. OSFI has borrowing rules in place to ensure homeowners can continue to pay their mortgages, a prospect that’s become more daunting with elevated rates.
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. With most mortgage rates at commercial banks over 5 per cent, that means homebuyers need to show they can carry loans with interest rates of more than 7 per cent.
The government should make it even harder for Canadians to buy homes, Alberta Investment Management Co. Chief Executive Officer Evan Siddall said during a Canadian Club Toronto discussion Tuesday, adding that the state of unaffordability arose because “we glorify ownership.”
“People buy houses and demand is massive, and there’s no supply. We allow people to buy houses with basically no equity,” said Siddall, who leads the $160 billion Alberta pension fund and previously headed up the Canada Mortgage and Housing Corp.
Siddall suggested increasing the minimum down payment to 10 per cent from 5 per cent.
“If you make it less attractive to own homes, houses won’t be as hot,” he said, adding that taxing capital gains on home sales would be the best measure to cool the market, but that such a move would be hugely unpopular. “So we’re stuck.”