Federal rules stipulate that mortgages must be amortizing — meaning borrowers must be repaying principal — but lenders have three options once a trigger-rate threshold is reached: raise monthly payments, require a lump-sum pre-payment on the mortgage, or allow borrowers to slip into negative or reverse amortization for a period under rules set by banking authorities and mortgage insurers.
Toronto-Dominion Bank says on its website that rising rates may put customers in a position where “unpaid interest will start to increase the amount owing” on their mortgage. There is a limit, though, and borrowers will ultimately have to adjust payments, make a pre-payment, or convert to a fixed-rate mortgage, according to the website.
In an emailed statement Saindon said OSFI is “working with federally regulated financial institutions on an ongoing basis to assess the impact of actions they are considering” to deal with borrowers hitting the trigger rate on variable mortgages.
One way they could do that is by formally allowing amortization extensions up to 40 years for borrowers with high debt ratios, something McLister says mortgage default insurers support. A further subset of those, perhaps one in five, might be vulnerable to significant rate increases at maturity, based on Bank of Canada data, he said, “and of those, only a single-digit percentage would default using history as a guide.”
Differences in mortgage products offered by Canada’s largest banks could have an impact on their experience with loans in arrears and defaults.
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