(Reuters) – The Bank of Canada has urged banks to reconsider offering variable rate mortgages with fixed payments, concerned about the number of borrowers faced with negative amortization of their loans.
“I think that product needs a close look and I think it’ll get a close look,” Senior Deputy Governor Carolyn Rogers (NYSE:) said in an interview with Bloomberg News on Friday. “I think you’ll see the industry reflect on how much they want to offer that product,” she added
Many variable rate mortgages in Canada require borrowers to make regular payments in fixed amounts. So when interest rates rise, a greater share of the payment goes toward paying interest on the loan rather than paying down the principal, resulting in the amortization period being extended.
The rapid pace of interest-rate hikes by the Bank of Canada since last year has pushed some mortgages into negative amortization, which occurs when interest on a loan exceeds the fixed payment on the principle — resulting in borrowers adding to the principle
When it comes to loans, it’s a bit worrying. You definitely don’t want to find yourself with a hefty portfolio of negative amortizing mortgages,” Rogers expressed. “It’s a lose-lose situation – not beneficial for the banks and certainly not for the mortgage holders.”
Shifting gears to monetary policy, Rogers shared, “We’re keeping a rate hike on the table until we can confidently say that we’re making solid strides” towards reducing core inflation to our target.
Recent inflation data from September showed a glimmer of progress on the central bank’s preferred measures of underlying price pressures. However, these measures are still significantly above the 2% inflation target. As for the money markets, they’re not anticipating any further tightening from the BoC. In fact, they’re predicting a rate cut by June.
Photo: Bank of Canada – Banque du Canada from Canada, CC BY 2.0, via Wikimedia Commons
