Institutions, regulators should control 'negative amortization' mortgages, says BoC's Rogers

These mortgages have led to massive household debt, according to Bank of Canada's senior deputy governor

Institutions, regulators should control 'negative amortization' mortgages, says BoC's Rogers

Canadian financial institutions and banking regulators should begin formulating policies on “negative amortization” mortgages that have led to enormous amounts of long-term debt for households as interest rates steadily increased, according to Bank of Canada senior deputy governor Carolyn Rogers.

These mortgages, which are designed to help borrowers manage costs by allowing them to repay at fixed levels, are a growing concern due to the likelihood of their amortizations getting extended by decades due to higher overall costs, Rogers said.

“I think that product needs a close look and I think it’ll get a close look,” Rogers told Bloomberg News. “I think you’ll see the industry reflect on how much they want to offer that product.”

Rogers estimated that ultra-long-amortization mortgages in Canada now total more than $200 billion.

“It is concerning,” Rogers said. “You don’t want a big portfolio of negative amortizing mortgages. 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.”

BoC policy now bearing fruit

The most recent economic results indicate that the central bank’s monetary policy is “really starting to take hold,” Rogers said.

At the same time, annualized inflation in Canada has remained above the 1%-3% range for 29 of the past 30 months, Rogers said. The BoC’s inflation target remains at 2%.

“A rate hike is on the table until we are really confident that we are clearly on our way,” Rogers said, adding that stronger-than-expected price pressures and excess demand “are the kinds of things that I think would make us reflect.”