FCAC Supervisory Highlight: Report on the Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances

Background

In early 2023, the Financial Consumer Agency of Canada (FCAC) recognized that financial consumers were facing a challenging economic environment due to the combined effects of high household indebtedness, an increase in the cost of living, and a relatively rapid increase in interest rates that had begun in 2022. Taken together, these represented exceptional circumstances that could lead to some mortgage holders experiencing severe financial stress and being at risk of defaulting on their mortgage.

FCAC survey research at that time found that two thirds of mortgage holders indicated having difficulty in meeting their overall financial commitments^{Footnote 1} .

In July 2023, and following public consultation, FCAC published the Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline), which set expectations for federally regulated financial institutions (FRFIs) to provide support to mortgage holders experiencing severe financial stress. The Guideline is applicable to all FRFIs offering mortgages on principal residences.

More specifically, it set expectations for FRFIs to support mortgage holders who are “natural persons” (i.e., not corporations or businesses) that hold an existing mortgage loan on their principal residence and are at risk of defaulting on their mortgage.^{Footnote 2}

In response to the Guideline, FRFIs are expected to establish and implement effective policies and procedures to support mortgage holders at risk, the scope of which includes the following:

• identifying early signs of severe financial stress and mortgage accounts at risk of default;
• proactively contacting the holders of mortgage accounts at risk of default to allow mortgage holders to make timely and informed decisions; and,
• establishing criteria for offering appropriate mortgage relief measures, informed by the specific circumstances and financial needs of mortgage holders.

Guideline reporting

Pursuant to the Guideline, FRFIs are currently reporting quarterly to FCAC. This reporting includes information on mortgage accounts at risk, proactive contact made to mortgage holders with mortgage accounts at risk, and relief measures put in place based on the financial circumstances and needs of individual mortgage holders. The data presented below represents four quarters of data ending June 30, 2024, as reported by FRFIs.

In Canada, mortgages fall under three main types:

• Fixed Rate Mortgage (FRM): A mortgage in which the interest rate and mortgage payments remain the same throughout the term of the mortgage.
• Variable Rate Mortgage with Fixed Payments (VRMFP): A mortgage in which mortgage payments remain the same throughout the term of the mortgage, irrespective of any fluctuations in interest rates.
• Variable Rate Mortgage with Variable Payments (VRMVP): A mortgage in which mortgage payments may change in accordance with any changes to the interest rates throughout the term of the mortgage.

General observations

In implementing the Guideline, FRFIs have either enhanced pre-existing hardship programs or established a supplementary mortgage relief program in response to the Guideline. In the case of the latter, FRFIs are reporting data based on supplemental programming put in place following the publication of the Guideline, which does not include data on mortgage-related relief measures that may be available to mortgage holders under pre-existing hardship programs.

Consistent with the Guideline, FRFIs’ policies and procedures are to align with the nature, size, and complexity of their business, distribution channels, and products and services. As a result, implementation measures, such as the criteria for potential relief measures, vary across FRFIs. For example, some FRFIs only offer FRMs and therefore their definition of an at-risk account would be focused on mortgages approaching renewal, while others that offer variable rate mortgages may also focus on client metrics such as credit score when identifying mortgages holders that may be at risk and in need of potential support.

Reported data

FRFIs have reported having approximately 5 million mortgage accounts on principal residences. This number has remained relatively stable across the four reporting quarters ending June 2024. As illustrated in Figure 1, FRMs represent the highest share of principal residential mortgage accounts (79%), followed by VRMFPs (14%) and then VRMVPs (7%).

Figure 1: Principal residential mortgage accounts by mortgage type, as at September 30, 2023, and June 30, 2024

The Guideline set expectations for FRFIs to establish and implement effective policies and procedures to proactively monitor and identify early signs of severe financial stress among mortgage holders with principal residence mortgages accounts.

Quarter over quarter, reporting indicates that the number of accounts identified as being at risk has increased, as seen in Figure 2. This increase is primarily among mortgage holders with FRMs. VRMVP mortgage accounts were reported to have the highest proportion of at-risk accounts, followed by VRMFP mortgages.

Figure 2: Principal residential mortgage accounts at risk by mortgage type, September 30, 2023 to June 30, 2024

Negative amortization

VRMFP mortgages can be a concern in an environment of rising interest rates (as was the case in part of 2023) as VRMFPs can hit their trigger rate and enter negative amortization, which may require increased payments and/or lump sum payments to return the mortgage to its original amortization period. In September 2023, 31% of VRMFPs were reported to be in negative amortization, as shown in Figure 3. Based on reporting as of June 2024, approximately 18% of VRMFP mortgages (or 2.4% of all mortgages) were in negative amortization.

Figure 3: Principal residential mortgage accounts in negative amortization, September, 2023 to June 2024

Proactive monitoring

The Guideline set the expectation that FRFIs proactively contact mortgage holders whose accounts are identified as at risk. Since the publication of the Guideline, FRFIs have reported making more than 47,000 proactive reach outs to mortgage holders with principal residence mortgage accounts considered to be at risk, of which 13,818 were made in the quarter ending June 30, 2024, as shown in Figure 4.

Figure 4: Principal residential mortgage accounts proactively contacted by FRFIs, September 2023 to June 2024

Mortgage relief measures

Since the publication of the Guideline, FRFIs have reported implementing more than 8,000 relief measures for principal residence mortgage accounts at risk, as demonstrated in Figure 5.

When considering mortgage relief measures, it is important to note that FRFIs have indicated that not all mortgage holders have accepted the relief measures made available to them. FRFIs have reported more than 5,000 instances of mortgage relief measures being declined by mortgage holders.

Figure 5: Relief measures implemented for principal residential mortgage accounts at risk, September 2023 to June 2024

Overall, FRFIs have reported implementing relief measures that include:

• waiving prepayment penalties on lump-sum payments to avoid negative amortization
• waiving internal FRFI fees and costs
• waiving interest charges on interest that has been capitalized (i.e., not charging interest on interest accrued)
• waiving prepayment penalties in consumer-led sales
• extending amortization

Data from the quarter ending June 2024 indicates that the implementation of the relief measures noted above allowed mortgage holders to avoid more than $4,000,000 in prepayment penalties for lump-sum payments to avoid negative amortization, and more than $200,000 in fees and costs waived by FRFIs.

Housing market outlook

The Canada Mortgage and Housing Corporation’s (CMHC) Residential Mortgage Industry Report^{Footnote 3}  notes that mortgage delinquency rates continue to increase with indications for further increases in 2025. However, these increases are off historic lows experienced during the pandemic. The most recent data from CMHC shows that the Q2 2024 mortgage delinquency rate in Canada is at 0.19%.

In addition, the Bank of Canada’s 2024 Financial Stability Report outlines that financial stress for Canadian mortgage holders has remained stable, with households relying on income growth, savings, and reduced discretionary spending to manage the increases to debt payments^{Footnote 4} . The Bank of Canada also notes that arrears on mortgages have continued to rise but that they remain below pre-pandemic levels.

FRFIs are expected to follow prudent lending practices and adhere to consumer protection requirements when providing mortgages to consumers, including the expectations set out in the Office of the Superintendent of Financial Institutions’ (OSFI) Guideline B-20 on Residential mortgage underwriting practices and procedures and the consumer protection requirements in the Financial Consumer Protection Framework.

With respect to areas where FRFIs should be particularly attentive, OSFI's fall update to its Annual Risk Outlook ^{Footnote 5} (ARO) indicates the real estate secured lending and mortgage risk remains one of the top prudential risks for 2024-25. OSFI outlines in its ARO that, as of February 2024, 76% of the number of outstanding mortgages will be coming up for renewal by the end of 2026. They also indicate that as of July 2024, the percentage of the number of mortgages renewing by the end of 2026 had fallen to 69%, of which the majority have yet to experience a payment increase since the Bank of Canada started to raise its policy interest rate in March 2022.

FCAC’s Monthly Financial Well-Being Monitor,^{Footnote 6} which surveys Canadians on their day-to-day financial management and financial well-being, found that in 2022, 55% of Canadians were struggling to meet their financial commitments. FCAC’s recent survey results indicate that this percentage has remained stable. Sources of financial difficulty vary and can include economic factors, debt accumulation, unexpected expenses, and personal or familial life events. FCAC will continue to closely monitor the financial well-being of Canadians and will continue to advance initiatives to support their financial stability.

How FCAC will support consumers in the future

FCAC’s supervisory activities in relation to the Guideline and collaboration with FRFIs aim to create a supportive environment for mortgage holders at risk. FCAC will continue to monitor FRFIs’ adherence to the expectations set out in the Guideline. Any future observations that stem from monitoring the Guideline will be included in FCAC’s Annual Report.

FCAC continues to advise consumers to contact their financial institution at the earliest possible opportunity if consumers feel at risk of not keeping up with their mortgage payments. FCAC also provides unbiased information and practical tools to help consumers make timely and informed decisions. FCAC has produced new plain-language information for consumers that raises awareness of their rights and FCAC’s expectations for how banks should support mortgage holders who may be struggling to keep up with their mortgage payments during this period of exceptional circumstances.

FCAC also developed information for consumers to inform them about mortgage relief options that may be made available to them if they are experiencing financial difficulties. These consumer resources include content that highlights the risks of extended amortizations. In the winter of 2024, FCAC’s national advertising campaign titled “Housing Costs on Your Mind” encouraged Canadians to visit Canada.ca/it-pays-to-know for tools and resources related to financing and paying for a home, to help them make informed decisions about renting or buying a home and about choosing, renewing, and paying down a mortgage. This advertising campaign resumed in the summer of 2024.

Additionally, FCAC will also continue to conduct research, and monitor trends and issues that impact financial consumers and make this information public.