The plan might help safeguard the stability of the financial system – but could also see costs rise, says observer
Canada’s banking regulator is proposing new measures to tighten guidelines for lenders with negatively-amortized mortgages on their books – but could those changes ultimately place a higher burden on the end consumer?
The Office of the Superintendent of Financial Institutions (OSFI) announced on July 11 that it was putting forward plans to require financial institutions to hold more capital based on the higher risk of negatively amortized mortgages with a loan to value ratio of more than 65%, a move it said would “encourage banks to lessen the number of mortgages that would otherwise go into negative amortization.”
Those proposals, OSFI said in a release, would not lead to a payment increase for consumers with a current mortgage term, with the change aimed at making sure banks and mortgage insurers are “managing risks effectively.”
The plan is currently out for consultation, with the regulator seeking feedback and any proposed changes by September 1 of this year.
However, the measures have a strong chance of coming to fruition, according to mortgage broker and RATESDOTCA expert Victor Tran (pictured top). “OSFI typically don’t take these things lightly,” he told Canadian Mortgage Professional. “They’re proposing something that’s highly likely to be implemented.”
Still, the adjustment that could take place among lenders is one that may see mortgage costs ramp up for borrowers, he added, as financial institutions react to the new landscape.
“I don’t think it’s good news for regular consumers, because I think consumers or anyone signing for a new mortgage will likely pay higher rates,” he said. “And I think lenders will need to charge slightly higher rates just to kind of make up potential losses, if any, due to fewer mortgage originations.
“Essentially, in a nutshell, telling lenders they have to hold back some reserves or loss provisions means it’s less money for lenders to lend out, which translates to less money to be made at the end of the day.”
That could see new and existing customers charged higher rates and fees to offset some of those losses in mortgage origination, Tran said, as a way of keeping profit margins steady.
“So I don’t think it’s good for regular consumers, but obviously it’s seen as much needed just to protect the system,” he said.
In Q1, Canadian households borrowed $16.5 billion, with $11.2 billion in mortgage debt. The household debt service ratio increased to 14.9%, StatCan reported.https://t.co/7vNCET5Z4G#mortgagenews #mortgageindustry #economy #mortgagedebt #householddebt— Canadian Mortgage Professional Magazine (@CMPmagazine) July 24, 2023
What measures have financial institutions introduced to help struggling borrowers?
As mortgage borrowing costs and interest rates have spiked in recent months, many financial institutions have stretched out the mortgage amortization length for struggling or heavily impacted borrowers to prevent huge surges in monthly payments.
While interest rates remained resolutely low throughout the COVID-19 pandemic, they started to creep upwards in March of last year – and accelerated at a rapid clip as the Bank of Canada struggled with an inflation crisis that for a time showed little sign of slowing.
That may be an imperfect solution to the current rising-rate environment – but there’s not much other choice for either lenders or borrowers presently, according to Tran.
“I don’t think there’s any other solution to handhold these clients, but to extend the amortizations or cap outstanding interest that they owe to the lender to the mortgage balance, which is unfortunate,” he said.
“For the lenders, I think there’s really no disadvantage to the. Their profit margins are increasing. They’re making more money by charging interest on interest and delaying the paydown of the mortgage principal.”
Why it’s in lenders’ interest to avoid power of sale and foreclosure scenarios
Ultimately, lenders are in the business to make money rather than foreclose on homes or go to a power sale scenario, Tran added, meaning that it’s essentially in their interest to do what they can to help keep borrowers in their property and on track with their payments.
“I think if the rates continue to rise, or even come renewal when a lot of mortgages are potentially forced to bring their amortization back down to the original contractual amortization, the lenders will do what they can to help these customers out, to ensure they still have a home to live in and they don’t ever default on the mortgage,” he said.