The Senate Banking committee raised questions this week about bankers' sale of mortgages that have been labelled as causing a 'payment shock' for borrowers.According to Blacklock’s Reporter, approximately $246 billion of mortgages were sold with variable rates and fixed payments.Cabinet must “strengthen consumer protection and ensure financial institutions are offering safe mortgage products to Canadians and providing fair and reasonable relief measures to help those in financial distress,” the Banking committee wrote in its Study on Housing Affordability Interim Findings. Senators recommended reforms be included in the 2024 federal budget.Peter Routledge, superintendent of Financial Institutions, has repeatedly warned of “significant payment shock” for homeowners sold variable-rate mortgages at fixed payments. “Mortgagors will have to make up the deferred principal pay downs when they renew,” Routledge wrote in an October 12 update to his 2023 Annual Risk Outlook. “This means they are at risk of suffering a significant payment shock.”“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,” wrote Routledge, adding borrowers with variable-rate, fixed-payment loans were already under pressure.“We have observed a deterioration in the credit quality of variable rate, fixed payment mortgages,” he wrote. “When interest rates rise, the loans reach a trigger rate when the fixed payment only covers the interest but none of the principal.”In a May 10 testimony at the Senate Banking committee, Rutledge depicted the mortgages as inherently risky with rising rates. “It’s not immediate,” he said. “If you happen to have that mortgage and your payment is say $2,200 a month, you’re still paying $2,200 a month. 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.” On August 11, 2022, the Commons Finance committee declined a motion to investigate the effects of mortgage renewals on borrowers with variable-rate, fixed-payment loans.“We are not paying close enough attention to what is happening in the mortgage market,” Conservative MP Adam Chambers (Simcoe North, ON) told the committee.“We are thinking about this every day,” said Liberal MP Julie Dzerowicz (Davenport, ON). “We will continue to be listening to Canadians. We will continue to be open to all the best ideas.”
