The chief bank inspector of Canada expressed his concern to the Senate Banking committee on Wednesday about certain variable rate mortgages worth billions of dollars, according to Blacklock’s Reporter.. Peter Routledge .“We are watching very carefully,” Peter Routledge, superintendent of Financial Institutions, told the committee..“What I am concerned about is the build-up in variable rate mortgages with fixed payments,” testified Routledge..“During 2021 and 2022, there was a sizeable increase in household mortgages underwritten with that product.”.“Variable rate mortgages with fixed payments are a fragility in our housing system,” said Routledge..The loans typically amortized over 25 years represent a growing risk as payments are rescheduled..“As rates went up, those payments remained fixed, but the interest charges against the mortgage went up,” said Routledge..“Some of those amortization periods, just by the math of the product, have extended.”.“The fragility comes in that it’s not immediate; if you happen to have that mortgage and your payment is, say, $2,200 a month, you’re still paying $2,200 a month,” said Routledge..“You are not knocking down your principal at this stage, but you’re not experiencing payment shock.”.“The risk is in about three to four years when some of those payments, not some, all of them, will have to be rescheduled according to the original amortization table,” said Routledge..“The risk for that product is a little further out, but it is a fragility we are watching very carefully.”.According to the Monthly Credit Aggregates reports from Statistics Canada, the total mortgage debt in Canada amounts to $2.1 trillion..Manulife estimates $307 billion is held in variable-rate mortgages, while $246 billion has fixed payments..Routledge said federal inspectors “never rest easy,” but added he saw little chance of a bank failure in Canada..“I don’t think Canadian banks will feel the same degree of pressure as US banks,” said Routledge.. Interest ratesThe CD Howe Institute is recommending the Bank of Canada leave interest rates at 5%. .To date, American regulators managed three bank failures, including Silicon Valley Bank of Santa Clara, Calif. on March 10, the Signature Bank of New York on March 12 and First Republic Bank of San Francisco on May 1..“Structurally, we don’t have the same degree of interest rate risk on the balance sheets of the banks in Canada,” said Routledge..“You may ask, why? Fundamentally our mortgages are for a term of five years. A standard fixed mortgage runs for five years. In the United States, a standard fixed mortgage runs for 30 years.”.Regulation of federal banks in Canada is also stricter than state regulation of local institutions in the US, said Routledge. .In Canada “whether you’re a billion-dollar bank or a trillion-dollar bank, you are subject to liquidity rules,” said Routledge..“In the United States, they relaxed that.”.“So a combination of industry structure and a little bit tougher rules across the whole system means I don’t think we will feel the same degree of interest rate risk stress at Canadian banks,” said Routledge.
The chief bank inspector of Canada expressed his concern to the Senate Banking committee on Wednesday about certain variable rate mortgages worth billions of dollars, according to Blacklock’s Reporter.. Peter Routledge .“We are watching very carefully,” Peter Routledge, superintendent of Financial Institutions, told the committee..“What I am concerned about is the build-up in variable rate mortgages with fixed payments,” testified Routledge..“During 2021 and 2022, there was a sizeable increase in household mortgages underwritten with that product.”.“Variable rate mortgages with fixed payments are a fragility in our housing system,” said Routledge..The loans typically amortized over 25 years represent a growing risk as payments are rescheduled..“As rates went up, those payments remained fixed, but the interest charges against the mortgage went up,” said Routledge..“Some of those amortization periods, just by the math of the product, have extended.”.“The fragility comes in that it’s not immediate; if you happen to have that mortgage and your payment is, say, $2,200 a month, you’re still paying $2,200 a month,” said Routledge..“You are not knocking down your principal at this stage, but you’re not experiencing payment shock.”.“The risk is in about three to four years when some of those payments, not some, all of them, will have to be rescheduled according to the original amortization table,” said Routledge..“The risk for that product is a little further out, but it is a fragility we are watching very carefully.”.According to the Monthly Credit Aggregates reports from Statistics Canada, the total mortgage debt in Canada amounts to $2.1 trillion..Manulife estimates $307 billion is held in variable-rate mortgages, while $246 billion has fixed payments..Routledge said federal inspectors “never rest easy,” but added he saw little chance of a bank failure in Canada..“I don’t think Canadian banks will feel the same degree of pressure as US banks,” said Routledge.. Interest ratesThe CD Howe Institute is recommending the Bank of Canada leave interest rates at 5%. .To date, American regulators managed three bank failures, including Silicon Valley Bank of Santa Clara, Calif. on March 10, the Signature Bank of New York on March 12 and First Republic Bank of San Francisco on May 1..“Structurally, we don’t have the same degree of interest rate risk on the balance sheets of the banks in Canada,” said Routledge..“You may ask, why? Fundamentally our mortgages are for a term of five years. A standard fixed mortgage runs for five years. In the United States, a standard fixed mortgage runs for 30 years.”.Regulation of federal banks in Canada is also stricter than state regulation of local institutions in the US, said Routledge. .In Canada “whether you’re a billion-dollar bank or a trillion-dollar bank, you are subject to liquidity rules,” said Routledge..“In the United States, they relaxed that.”.“So a combination of industry structure and a little bit tougher rules across the whole system means I don’t think we will feel the same degree of interest rate risk stress at Canadian banks,” said Routledge.
