OSFI believes mortgage amortization extension bears certain risks

Although the temporary extension of the mortgage amortization period has served as a saving life jacket for many variable-rate mortgage holders who’ve faced the consequences of higher interest rates and borrowing costs, the Office of the Superintendent of Financial Institutions (OSFI) still believes this option bears certain risk, as it keeps borrowers in debt longer and raises the interest payments amount.

That’s according to Tolga Yalkin, an assistant superintendent at the OSFI.

“During our conversations with financial institutions we underline the importance of proactive accounts management and acting before borrower stress becomes unmanageable,” – Yalkin noted. “We have made it clear that we appreciate lenders’ work with clients, helping them keep their homes and making sure the taken measures are still within the institution’s risk appetite. We also recognize that it could be extremely difficult to achieve.”

In the first quarter, several Big 6 banks showed ongoing growth in the length of their clients’ amortization terms (the period of time necessary for paying off the mortgage fully with the current payments).

About one-third of BMO’s residential mortgages have an amortization period of more than 30 years, while there were none just a year ago. TD says 27% of its residential mortgage portfolio has an amortization period exceeding 35 years.

As a rule, the mortgage contracts will go back to the initial amortization period at the next term renewal, which will usually lead to higher payments.

According to Yalkin, OSFI has been tracking different indicators of mortgage risk for signals pointing to borrower vulnerability.

Yalkin also touched upon the question of concerns coming from those who consider OSFI’s current underwriting standards already too strict amid today’s low delinquency rates in Canada.

The national delinquency rate (the share of mortgages with payments late by at least three months) is still at record lows at 0.16% in January, the Canadian Bankers Association reports. It remains below the rate of 0.27% seen in the middle of 2020. The average number in the years after the previous financial crisis is 0.45%.

Yalkin called delinquencies a lagging indicator. In the nearest future, Yalkin believes risks will mostly focus on variable-rate mortgage holders (with both static and adjustable types of payments) and on fixed-rate holders who need to renew soon.

One of the longer-term risks OSFI is worried about comes from the growing level of household indebtedness.

In its Annual Risk Outlook, OSFI pointed out certain risks related to the sharp increase in real estate prices and the growth in the number of highly indebted borrowers. The Office proposed three regulatory changes that, if introduced, may tighten mortgage lending even more.

The consultation period on the proposals ended today, and the OSFI will reveal its decision later this year.