Canadian regulator says banks reduce ultra-long-term mortgage lending

The rapid increase in mortgage lending during the pandemic poses a “risk” to the financial system, but Canada’s banks have begun to rein in problems with ultra-long-term home loans, according to Canada’s banking regulator.

“The main unintended consequence that we’ve experienced during COVID-19 is an increase in mortgage underwriting,” Peter Routledge, director of the Office of the Superintendent of Financial Institutions, told a National Bank of Canada financial services conference in Montreal on Tuesday.

“This creates a concentration of risk that we have been really concerned about since its inception,” he said. But he added that it was “a small portion of the risk. I don’t think the risk is systemic, but it could lead to a period of of uncertaintyā€¯ housing systems. ”

At the height of the housing boom driven by a low interest rate environment, banks issued 40% more home loans than the pre-pandemic average, he said. Additionally, half of these are variable-rate mortgages compared to conventional loans. Normal rates are less than a quarter, he said.

“Despite this risk, I am amazed at how Canadians and their lenders continue to control the risk,” Routledge said.

Canadian banks currently have about C$220 billion ($162 billion) in mortgages with amortization periods (the length of time allowed to pay off the loans) of more than 35 years. That’s down 27% from its peak of nearly C$300 billion, he said. .

“That’s a very good sign and I’m encouraged by it.”

Routledge’s comments were more optimistic than those he made last fall, when he issued stark warnings about the particular risks of adjustable-rate mortgages with fixed monthly payments, including calling them “dangerous” at a government hearing. product.

Borrowers with this type of loan find that the portion of their monthly payment that goes toward interest increases dramatically until they are no longer paying back any part of the principal of the loan.

This results in a theoretical amortization period that is decades longer than the standard 30 years. But the contract with the bank doesn’t actually change, so when homeowners renew their mortgage at the end of a typical five-year term, they’re likely to face higher monthly payments.

Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal are the only three major banks that allow this type of negative amortization mortgage. Such mortgage lending by the three banks fell 27% in the six months to the end of January, to a total of C$94 billion. That was down from C$128.3 billion at the end of July, according to the quarterly report.

Routledge did not specifically highlight the risks of negative amortization mortgages during an on-stage interview on Tuesday, but in a copy of prepared remarks he said the housing system would suffer if such products were “less common.” Get better service.

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