Canada’s chief bank inspector warned of “significant payment shock” for homeowners with variable interest rate mortgages with fixed payments but changing interest rates..According to Blacklock’s Reporter, Superintendent of Financial Institutions Peter Routledge said some homeowners are at risk due to no longer paying the principal part of their loans..“Mortgagors will have to make up the deferred principal pay downs when they renew,” Routledge wrote in an update to his 2023 Annual Risk Outlook. .“This means they are at risk of suffering a significant payment shock.”.Across the country, mortgages worth $246 billion had variable interest rates, but the payments stayed the same..“As the impact of higher rates continues to be absorbed, the ability of consumers and businesses to adapt to the current rate environment will be tested as loans mature over the next few years,” wrote Routledge..“Our primary aim is to ensure Canadian homeowners can afford to service their mortgages in good times and hard times,” he said. However, borrowers who signed up for variable rate, fixed payment loans are already under pressure, wrote Routledge..“We have observed a deterioration in the credit quality of variable rate, fixed payment mortgages,” said Routledge. .“When interest rates rise, the loans reach a trigger rate when the fixed payment only covers the interest but none of the principal.”.In testimony on May 10 at the Senate Banking committee, Routledge said “he was worried by the number of homeowners who faced catastrophic consequences in renewing their variable rate loans. We are watching very carefully.”.“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.”.“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.”.The loans were typically amortized over 25 years. Routledge on Thursday warned of a “common misperception that these mortgage amortization periods extend.”
