Chief Canadian Bank Inspector Warns of Mortgage Payment Shock

Multiple for-sale and sold real estate signs in Mississauga, Ont., on May 24, 2023. The Canadian Press/Nathan Denette

Canada’s chief bank inspector has warned that homeowners could face rising financial pressure in servicing their mortgages as many could face “significant payment shock.”

“Mortgagors will have to make up the deferred principal pay downs when they renew,” Superintendent of Financial Institutions Peter Routledge said, according to Blacklock’s Reporter. “This means they are at risk of suffering a significant payment shock.”

The country’s banks currently have $246 billion in mortgages nationwide that were charged at variable rates but with fixed payments and amortization periods—the length of time permitted to pay off the loan. These current loans were typically amortized over 25 years.

In an update to the Office of the Superintendent of Financial Institutions’ (OSFI) 2023 Annual Risk Outlook, Mr. Routledge warned of a “common misperception that these mortgage amortization periods extend.”

The superintendent believes homeowners currently at risk of this are “no longer paying anything against the principal of their loans.”

The OSFI ensures Federally Regulated Financial Institutions are in sound financial condition and contributes to public confidence in the Canadian financial system.

There has been a deterioration in the credit quality of variable rate, fixed payment mortgages, Mr. Routledge said, and when interest rates rise, “the loans reach a trigger rate when the fixed payment only covers the interest but none of the principal.”

Before the Senate Banking Committee on May 10, Mr. Routledge testified that he and the OSFI were watching “very closely” as they were concerned about the consequences faced by homeowners when renewing their variable rate loans.

He said there was a sizeable increase in this type of mortgage in Canada during 2021 and 2022.

“The fragility comes in that, it’s not immediate, if you happen to have that mortgage and your payment is say $2,200 a month, you’re still paying $2,200 a month,” Mr. Routledge said.

“You are not knocking down your principal at this stage but you’re not experiencing payment shock.”

Mr. Routledge went on to say a major risk will be in three to four years when all of the payments “will have to be rescheduled according to the original amortization table.”

According to the Canadian Mortgage and Housing Corporation (CMHC), rising interest rates and high inflation are causing Canadian mortgage borrowers to shift their behaviour.

“With record levels of mortgage debt and the higher cost of living, questions are arising around the ability of Canadian households to make their monthly debt payments,” said Tania Bourassa-Ochoa, senior specialist of housing research at CMHC.

CMHC found that cooling housing markets across Canada had resulted in decelerating mortgage growth in 2022. However, despite increasing worries around homeowners’ abilities to make their mortgage payments on time, mortgages in arrears remained at low levels.

Mr. Routledge warned the impact of higher rates will continue to be absorbed by Canadian businesses and consumers as they adapt to the current rate environment, which “will be tested as loans mature over the next few years.”

“Our primary aim is to ensure Canadian homeowners can afford to service their mortgages in good times and hard times,” Mr. Routledge said.