Regulator highlights potential strain as renewals loom
Canada’s banking regulator has sounded the alarm on the risks posed by mortgage lending to the national financial system as a wave of renewals approaches in the coming two years.
The Office of the Superintendent of Financial Institutions (OSFI) said in its risk outlook for the coming year that with 76% of mortgages outstanding as of February up for renewal by the end of 2026, homeowners could face a “payment shock” – with that risk particularly acute for borrowers who took out their mortgage in the period between 2020 and 2022.
The regulator highlighted the risk of higher defaults and credit losses for institutions in the event of a downturn in the real estate market, given the strain already evident among some adjustable-rate mortgage borrowers.
Of “specific concern”, OSFI said, are variable-rate mortgages with fixed payments – particularly those which are already in negative amortization.
Since the mortgage term for those products does not change until refinancing takes place, the regulator said borrowers on uninsured variable-rate fixed-payment mortgages would need to deal with higher outstanding principal balances and a potentially sizeable payment shock.
Available now: OSFI’s 2024-2025 Annual Risk Outlook
— Superintendent of Financial Institutions (@OSFICanada) May 22, 2024
This publication outlines 4 risks we’ve identified as the most significant risks facing Canada’s financial system.
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OSFI underlined its efforts to introduce loan-to-income limits for uninsured mortgages to prevent swelling numbers of highly leveraged borrowers, and said it was focused on ensuring that institutions “actively assess the risks posed by variable rate mortgages with fixed payments.”
With household debt rising, the regulator emphasized the potential for a weakening in the labour market to “dramatically” change the landscape for Canadian households.
“There are signs higher mortgage payments are taking a larger part of some households’ income, leading to increases in the number of borrowers not being able to make payments on other loans and debts,” it said.
The risk outlook also mentioned the “significant exposure” posed by wholesale credit risk, mainly from commercial real estate lending and corporate and commercial debt.
Current challenges in that area are expected to extend beyond this year and into 2025 thanks to elevated interest rates, softening demand and inflation challenges, according to OSFI.
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