House Standing Committee on Finance (February 13, 2024)
ISSUE: Variable rate mortgages with fixed payments; unregulated lending (& OSFI’s position)

Key points

• Variable rate fixed payment mortgages offer consumers the advantage of stable monthly payments while being exposed to fluctuating interest rates. While these mortgages can provide initial cost savings, they also entail certain risks that consumers need to be aware of to make informed decisions regarding their mortgage financing.
• When interest rates rise, more of each mortgage payment automatically goes toward interest costs. Consumers could end up in a situation where none of their mortgage payment goes toward paying down the principal.
• This is the case when consumers reach their mortgage trigger rate. The trigger rate is the interest rate at which a mortgage only covers interest costs.
• When a trigger rate is reached, financial institutions may require consumers to either increase their payments, make additional payments to cover excess interest costs or change their mortgage to a fixed interest rate mortgage.
• Trigger rate differs from trigger point: hitting your trigger point means your mortgage balance has grown beyond the lender's acceptable ratio for the amount of equity you need to hold vs. the purchase value of your home.
• Variable interest rate mortgages can exceed their trigger rate until they reach the trigger point. When this happens, you will be required to adjust your payments, make a prepayment, or pay off the balance of the mortgage.

Background info on: OSFI’s position conveyed to the Standing Senate Committee on Banking, Commerce and the Economy:

• Peter Routledge stated that, from OSFI’s perspective, variable rate mortgages with fixed payments are “dangerous” products that can put homeowners in a position of making mortgage payments that are less than the interest being charged. This would result in a growing mortgage balance and therefore a higher risk of default.
• Routledge indicated that the work OSFI has done with FCAC to provide relief options to consumers facing financial difficulties should lessen the incidents of delinquency if they are provided fairly.
• Quote: “All else equal, while not wanting to impose a judgment on product design… We think the system would be healthier with less of that product. We immediately addressed it by changing our capital requirements for negatively amortizing mortgages. That may make the product less attractive to the borrowers.” Read the full transcript…

Background info on: OSFI’s recent response to media inquiry re: unregulated lenders

• OSFI has indicated it is watching the unregulated mortgage market. However, OSFI’s primary focus is on the institutions it regulates.
• While the prevalence of private mortgage lenders is growing, it’s not growing in a way that causes OSFI to be concerned about possible impacts on the regulated space.
• If unregulated lending did become a concern, OSFI would consider supervisory and capital responses with its regulated perimeter, and work with partners to respond.
• For information concerning private mortgage lenders and the unregulated mortgage market, media should contact the Canadian Mortgage and Housing Corporation (CMHC). Their website contains information under the Residential Mortgage Industry Data Dashboard | CMHC (cmhc-schl.gc.ca).