Article content
(Bloomberg) — Canada’s banking regulator is proposing to make it more expensive for lenders to absorb mortgage lenders who extend their loans in an effort to reduce housing market risk in the financial system.
Article content
Lenders will have to hold more principal against mortgages that are in “negative amortization” — that is, where the monthly payments are no longer enough to cover the interest due, so the balance gets bigger. The new rules will apply to mortgages where the loan amount is 65% or more of the value of the property, according to a proposal released Tuesday by the Office of the Superintendent of Financial Institutions.
Article content
The move is the latest attempt by regulators to contain the fallout from the Bank of Canada’s rate hikes over the past year.
Canada’s portfolio of variable mortgages, which track the central bank’s overnight interest rate, have come under particular scrutiny. The products became extremely popular when prices were at their lowest during the early part of the covid pandemic. But when the central bank sharply raised interest rates last year, some borrowers took the option of not paying the full amount of interest they owe each month.
Article content
This unpaid interest is put on the principal instead, a process called negative amortization because as the loan grows, the lender extends the total time to pay it back.
In its proposal, OSFI said the regulator’s proposal for higher capital requirements would provide an additional constraint on how banks can use the tool, and “encourage banks to reduce the number of mortgages that would turn into negative amortization.” It will be open for comment until September 1.
The statement said the change in the bank’s capital requirements will not lead to an increase in monthly payments for borrowers during their current term.
Read more: Canada adds guidelines for banks to prevent mortgage defaults