Canadian banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has said that the mortgage amortization extension which is being offered to borrowers at the moment is a short-term solution that may keep them debt-ridden for longer periods. This solution may offer temporary relief to variable-rate mortgage holders as it will help them deal with high-interest rates but it could prove to be an expensive affair both for the banks as well as the borrowers. Speaking about the situation, Tolga Yalkin, an assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), said, "Our conversations with financial institutions have emphasized proactively managing accounts, acting before borrower stress become[s] unmanageable. We have been clear that we appreciate lenders working with clients to help them stay in their homes while ensuring actions taken remain within the institution’s risk appetite while recognizing this can sometimes be a challenging path for lenders to navigate.”
Most big Canadian banks give variable-rate mortgages at fixed monthly payments, but rising interest rates indicate that more money from the borrower’s monthly payment shall be used to cover interest costs, which only means there is less left to repay the principal amount. Hence, the amortization period is extended so that the mortgage payments are constant. Yalkin said, "We’ve been seeing that the sharp change in the cost of borrowing is posing a short and long-term risk to mortgage holders and lenders," and that "the growth in highly leveraged borrowers has increased the risk of weaker credit performance." “While lending institutions are well-capitalized and financially resilient, the higher cost of borrowing—and any potential economic downturn—could lead to more borrower defaults, potentially a disorderly market reaction, and even broader economic uncertainty and volatility,” he added.
The big banks have reported continuous increases in the length of their amortization schedules or simply stated the time in which the borrowers will pay back their mortgages. As of January 2023, the residence mortgages with an amortization period of more than 30 years were 32% at Bank of Montreal and 30% at the Canadian Imperial Bank of Commerce. OSFI has suggested having tougher norms for lending requirements so that it gets more and more difficult to get mortgage approval.
If you too are a variable-rate mortgage holder and want to know how the mortgage amortization extension is going to impact your finances, or if you have any doubts or questions related to the same, do contact us at LendX Financial in Brampton, Greater Toronto Area.