Existing descriptions of supposed decades-long extensions are misleading, OSFI says
Reports of dramatically extended amortizations such as 70-year terms have been greatly exaggerated, according to the Office of the Superintendent of Financial Institutions.
Responding to reports on certain changes to variable-rate mortgages with fixed payments, OSFI said that existing descriptions of supposed decades-long extensions are “not entirely accurate.”
“Changes in interest rates do not change the contractual amortization period in the borrower’s VFM loan contract,” the OSFI said. “For example, when a borrower enters into a VFM contract with an amortization period of 25 years, that contractual amortization period of 25 years remains intact for the duration of the loan, regardless of interest rate changes.”
The agency said that lenders’ mortgage statements tend to include hypothetical amortization periods based on factors like remaining principal, anticipated future payments, and the current interest rate.
“This calculation has, for some borrowers, projected amortization periods of 70 or more years, or in some cases an infinite amortization period,” the OSFI said. “These kinds of projected amortizations are not realistic and do not represent what a borrower’s actual repayment period will be. Importantly, they do not change the borrower’s contractual amortization.”
Strategies like extending mortgage amortizations and changing the insured mortgage qualification threshold will not be effective housing #affordability measures, says Romy Bowers, President & CEO of Canada Mortgage and Housing Corporation.https://t.co/OJvhwZzChk#mortgagenews— Canadian Mortgage Professional Magazine (@CMPmagazine) June 20, 2023
The anxiety surrounding extended amortizations is founded, OSFI says
At the same time, the OSFI acknowledged that the fears surrounding supposed decades-long amortizations “show how shifts in market interest rates—especially large, rapid ones—can influence loan repayment.”
“This highlights the importance of lenders adequately testing borrowers’ repayment capacity with the [stress test] for a range of financial and economic conditions before loans are granted,” the OSFI said. “After the loan is granted, we expect lenders to take early actions, including proactive outreach to vulnerable/impacted borrowers.
“Borrowers can also take early actions to manage their debt loads during periods of high or rising interest rates. Those early actions could include: increasing mortgage payments, making lump sum payments, [and] renegotiating their mortgages.”