Banks seek workarounds to avoid mortgage default for variable-rate borrowers struggling with higher payments via financialpost
— the point at which set monthly payments cover only the interest while the principal remains unpaid. Nearly 13 per cent of all Canadian mortgages are affected, according to the central bank.Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails.
Another industry watcher said it is “reasonable” to conclude reverse amortization is also occurring, although there is not yet public data. This potentially increases risks to the lender and borrower because the loan balance is actually growing and can be a particularly worrying development at a time when property values are dropping.Article content
“For uninsured mortgages, OSFI has not set a specific amortization cap for financial institutions allowing negative amortization,” said Carole Saindon, a spokesperson for the federal banking regulatory. “However, we do expect actions taken to remain within the bank’s risk appetite.” However, if the central bank takes rates over five per cent, “we could have an unexpected arrears problem,” he said. “In that case, I wouldn’t be shocked to see the government announce some type of measure to help distressed borrowers.”
“So really we’re talking about a few hundred thousand households who may see their mortgage balances grow before maturity,” McLister said. “But it won’t be painless for the economy, and it isn’t designed to be. After all, the Bank of Canada raises interest rates with an eye to slowing the economy and thereby cooling inflation, and one of the key pathways for that slowdown will be the squeeze put on those carrying a lot of debt or thinking of buying a home.”
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