Canada’s financial watchdog warns banks over use of fixed-payment variable loans
Canada’s financial regulator warned banks last week that fixed-payment variable mortgages can saddle homeowners with a “forever mortgage.”
It’s not the first time the regulator has sounded the alarm over this type of mortgage begging the question of whether it causes consumers more harm than good.
Peter Routledge, superintendent of the Office of the Superintendent of Financial Institutions (OSFI), told a TD Securities financial services conference last Friday they were raising capital requirements for fixed payment variable mortgages, meaning big banks and mortgage insurers will need more adequate capital for riskier borrowers. “Ultimately, these decisions are to be made at the lender level,” Routledge said during the conference.
There are two types of variable rate mortgages. The variable-rate adjustable mortgage is where the interest rate rises or falls in sync with the Bank of Canada’s overnight lending rate. Rates for fixed-payment variable mortgages also adjust, but monthly payments stay the same and the amortization period — the length of time it takes to pay off the mortgage — grows as rates rise.
During the Bank of Canada’s rapid rate hike campaign, fixed-payment variable rate mortgages gained attention as some homeowners’ amortizations were automatically extending out to as long as 90 years. In some cases, people received infinity symbols on statements making it seem like they had “forever mortgages.”
Currently, 20 per cent of outstanding mortgages are fixed payment variable, an OSFI spokesperson said in an emailed statement.
The fixed payment variable became “more prevalent” during the pandemic when interest rates were low, the spokesperson said, with the majority of these loans maturing in 2026 and 2027. “In 2027, close to half of all maturing loans are variable with fixed payment.” The standard amortization period for a mortgage is 25 years.
Of the two variable rate products, four of the major banks, RBC, CIBC, TD, and BMO only offer the fixed-payment version, experts say.
“RBC does not allow negative amortizations at time of acquisition or for existing mortgages,” a spokesperson told the Star in an emailed statement. While some loans have amortizations greater than 30 years, it’s due to clients reaching their trigger rate — when only interest is paid on the mortgage — and as such RBC increases the clients monthly payment to ensure the mortgage does not negatively amortize.
A TD spokesperson said customers are told if their amortization has been extended, and at renewal are offered debt restructuring, payment deferrals or interest-only payments if they find payments too high.
The biggest concern with fixed-payment variable rate mortgages is when it comes time to renew, the borrower will need to return to the contractual amortization period, said Leah Zlatkin, LowestRates.ca expert and licensed mortgage broker, which will result in payment shock as monthly payments often spike.
Some homeowners, she said, have loan-to-value ratios of 100 per cent, meaning they have no equity in their house and pose the biggest risk to default.
“OSFI’s goal is to protect the banking system and is being overly cautious here,” she said. “The regulator is trying to protect banks from this type of borrower.”
Mortgage broker Ron Butler wonders if banks are not heeding OSFI’s warnings over fixed payment variable mortgages.
“This has been going on for months and so far banks haven’t changed products,” he said. “Maybe OSFI thought they’d see revised products by now.”
During the conference Routledge said, “I think the housing finance system would produce better outcomes for borrowers and lenders alike if this product was less prevalent.”
This article was reported by The Star
