Canada’s Financial Watchdog Issues Warning for Banks Offering Fixed-Payment Variable Loans
In a recent development, Canada’s financial regulator issued a warning to banks about the potential risks associated with fixed-payment variable mortgages, cautioning that they could lead to what is colloquially termed a “forever mortgage.”
This isn’t the first time the regulator, the Office of the Superintendent of Financial Institutions (OSFI), has raised concerns about this mortgage type, prompting a debate on whether it truly benefits consumers.
During a TD Securities financial services conference, Peter Routledge, the superintendent of OSFI, revealed that capital requirements for fixed payment variable mortgages would be increased. This implies that major banks and mortgage insurers will now need to hold more substantial capital to cover the risks associated with these mortgages, particularly for higher-risk borrowers.
Routledge emphasized that the ultimate decision on offering such mortgages lies with the individual lenders.
Fixed-payment variable mortgages come in two types. The first is the variable-rate adjustable mortgage, where interest rates move in tandem with the Bank of Canada’s overnight lending rate. The second type, the fixed-payment variable mortgage, also experiences interest rate adjustments.
However, the unique aspect is that monthly payments remain constant, resulting in an extension of the amortization period as interest rates rise.
During the Bank of Canada’s recent rapid rate hikes, fixed-payment variable mortgages gained attention for automatically prolonging some homeowners’ amortization periods up to a staggering 90 years. This led to instances where mortgage statements displayed infinity symbols, creating the perception of “forever mortgages.”
According to an OSFI spokesperson, currently, 20% of outstanding mortgages fall under the fixed-payment variable category. The prevalence of these mortgages increased notably during the pandemic, driven by low-interest rates.
A significant portion of these loans is expected to mature in 2026 and 2027, with close to half of all maturing loans in 2027 falling under the variable with fixed payment category. This is noteworthy as the standard amortization period for mortgages is typically 25 years.
It’s worth noting that among the major banks, including RBC, CIBC, TD, and BMO, only the fixed-payment version of variable rate mortgages is offered, as highlighted by industry experts. This raises questions about the potential impact on consumers and whether these mortgage products truly serve their best interests.
As the financial landscape evolves, it becomes crucial for both regulators and lenders to strike a balance that safeguards consumers while promoting a healthy mortgage market.
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