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Canada Adds Guidelines for Banks to Prevent Mortgage Defaults

Canada Adds Guidelines for Banks to Prevent Mortgage Defaults
The new guidelines issued by the Financial Consumer Agency of Canada recommend that Canadian banks take steps to assist mortgage holders who are facing difficulties due to a rapid spike in interest rates. These measures aim to alleviate the burden on borrowers and help them stay afloat. The guidelines include the following recommendations:


Waiving fees for lump sum or pre-payments: Banks are encouraged to waive any fees associated with making lump sum payments or pre-payments to reduce the overall debt burden. This allows borrowers to proactively manage their mortgage debt and potentially pay it off sooner.


Waiving fees for selling the house to repay the loan: In situations where selling the house becomes necessary to fully repay the mortgage, banks are advised to waive any fees associated with this process. This helps borrowers who may be facing financial difficulties and need to sell their property to settle their loan obligations.


Extending the loan timeline: Banks can consider extending the repayment timeline for borrowers, thereby reducing their monthly mortgage payments. This approach allows borrowers to have more manageable monthly obligations, especially in cases where they are struggling to keep up with regular payments.



The Financial Consumer Agency of Canada highlights the current economic environment characterized by high household debt, increased cost of living, and higher interest rates. These factors put some mortgage holders at risk of falling behind on their mortgage payments. The guidelines aim to provide relief and assistance to borrowers in such circumstances.

The interest rate increases by the Bank of Canada, although aimed at curbing inflation, have created challenges for Canadian homeowners. While there was a pause in rate hikes this year, the economy is regaining momentum, and there is speculation in the markets about further rate increases. The guidelines issued by the Financial Consumer Agency of Canada aim to address the potential impact of these interest rate spikes on mortgage holders and offer solutions to mitigate the challenges they may face.



Concerns about the real estate sector are particularly acute in Canada given the prevalence of variable-rate mortgages. In many cases, the interest rates on those loans have already risen so much that the borrowers’ set payments are no longer enough to cover even the monthly interest, causing the size of the loan to increase.



Negative Amortization


Negative amortization refers to a situation where the outstanding balance on a loan increases over time rather than decreasing. This occurs when the borrower’s periodic payments are insufficient to cover the interest charged on the loan. The unpaid interest is then added to the principal balance, leading to a higher loan amount.


In the context of Canadian mortgages, negative amortization has become a concern. Some borrowers are facing challenges in making their mortgage payments, and as a result, they are only able to cover the interest portion of their loans. This means that the principal balance of their mortgages remains unchanged or even increases over time.


The mentioned Canadian banks, including Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, and Royal Bank of Canada, have observed a significant portion of their mortgage portfolios falling into the category of negatively amortizing mortgages.


To address this issue and provide relief to borrowers, the government has introduced new guidelines for Canadian banks. These guidelines aim to pressure banks to offer more assistance to borrowers facing negative amortization. Some of the recommendations include not charging interest on the unpaid interest added to the principal and waiving internal fees.


If borrowers require additional time to manage their payments, the new guidelines suggest that the extended timeframe for paying back the mortgage should be reasonable. Lenders should also provide borrowers with information to help them return to their original payment schedule and explain the negative implications of carrying the debt over a longer period.


The government’s guidelines further recommend that fixed-rate borrowers nearing the end of their mortgage term should receive similar mortgage relief measures if they need to refinance at higher rates. Fixed-rate mortgages in Canada typically require renewal every five years, so even these borrowers may face pressure.


In the case of refinancing, the guidelines state that banks should not offer less favorable interest rates to borrowers who may be unable to qualify with a different lender. This ensures that borrowers are not penalized when seeking refinancing options due to their financial circumstances.


Overall, these guidelines aim to address the issue of negative amortization in Canadian mortgages and provide relief to borrowers facing challenges in making their mortgage payments.



Source: Bloomberg


John Siarkas

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