Bank of Canada urges closer look at negative amortization mortgages

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Canadian banks and regulators should take a closer look at mortgages that have allowed some households to accumulate large amounts of long-term debt as interest rates rose, the Bank of Canada said no. 2 officials said.

Carolyn Rogers, deputy governor of the Bank of Canada, said in an interview that the number of so-called “negative amortization” mortgages is a cause for concern. The loans have that label because they allow borrowers to make fixed payments, even when interest rates rise.

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In the short term, that reduces the impact of higher borrowing costs. But the flip side is that the amortization period (the time it takes to pay off the loan) extends over years or even decades. Rates have risen so rapidly that there are now more than $200 billion in mortgages in Canada with very long repayment periods; Many borrowers pay little or no principal for them.

“I think that product needs a close look and I think it will be,” Rogers told Bloomberg News, shortly after attending a meeting with senior banking executives in Toronto on Friday. “I think we’ll see the industry reflect on how much they want to offer that product.”

“It is worrying. “You don’t want a big portfolio of negative amortization mortgages,” she said. “It’s not good for banks or mortgage holders. But we understand that there is a fairly concerted effort to try to resolve them” before borrowers reach the renewal date on those loans.

It is rare for a senior Bank of Canada official to weigh in on a specific financial product. Prudential regulation of banks and insurance companies in Canada falls not with the central bank but with the Office of the Superintendent of Financial Institutions, where Rogers worked for a long career in financial regulation before joining the Bank of Canada almost two years ago. .

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His comments also highlight growing downside risks to the Canadian economy and financial system as the country’s highly indebted households renew their shorter-duration mortgages, a consequence of the bank’s aggressive campaign to tighten policy and rein in inflation.

Restoring price stability remains the central bank’s goal, and despite the delays, Rogers says the central bank is seeing monetary policy “really starting to take hold.”

The Bank of Canada’s mandate is to achieve two per cent inflation, operating within a control range of one to three per cent. Inflation has been above that range for 29 of the last 30 months.

Slowing core inflation is the primary requirement needed for policymakers to consider lowering rates, Rogers said, adding that officials are likely to keep the threat of additional increases alive until they see significant progress toward the goal.

“A rate hike is on the table until we are really confident that we are clearly on the right path,” Rogers said.

Asked what would trigger another rate hike, Rogers pointed to tougher-than-expected price pressures and excess demand, the same factors that led authorities to sideline and raise rates again in June and July.

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“Those kinds of surprises, those are the kinds of things that I think would give us pause,” Rogers said.

Rogers, the first non-economist to serve as senior deputy governor in the modern era, joined the bank in December 2021, when the overnight lending rate was at emergency levels of 0.25 percent and before inflation in Canada began to rise rapidly.

Rogers and Governor Tiff Macklem launched one of the most aggressive interest rate raising cycles in the central bank’s history in March 2022, taking the policy rate to five percent in just over a year and a half.

Still, price pressures remain stubbornly high in Canada. The central bank has delayed its expected return to the 2 percent target until the second half of 2025.

At the same time, there is growing evidence that the economy is weakening, which will allow authorities to pause rate hikes in September and October. On Friday, Canada recorded a small increase in employment and the unemployment rate rose to a 21-month high of 5.7 per cent. Preliminary data have also pointed to the possibility of a technical recession, or two consecutive quarters of economic contraction.

Bloomberg.com

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