Bank of Canada Raises Concerns Over Variable Rate Mortgage Products – Bloomberg News

The Bank of Canada has called on financial institutions to reassess their offerings of variable rate mortgages with fixed payments due to rising concerns about borrowers experiencing negative amortization on their loans.

Senior Deputy Governor Carolyn Rogers emphasized the need for scrutiny in this area during a recent interview with Bloomberg News. She noted, “I think that product needs a close look and I think it’ll get a close look. I think you’ll see the industry reflect on how much they want to offer that product.”

In Canada, many variable rate mortgages require borrowers to make fixed monthly payments. Consequently, when interest rates increase, a larger portion of each payment is directed toward interest, which can lead to an extended amortization period as the principal balance is not reduced effectively.

The swift increase in interest rates by the Bank of Canada over the past year has caused some mortgages to enter a state of negative amortization, where the interest charged exceeds the fixed payment. This situation ultimately results in borrowers adding to their principal balances.

Rogers expressed concern about this trend, stating, “You don’t want a big portfolio of negative amortizing mortgages. It’s not good for the banks, and it’s not good for the mortgage holders.”

Regarding monetary policy, she indicated that further rate hikes remain a possibility until there’s a clear assurance of downward movement in core inflation toward the established target.

Recent inflation data for September suggested some improvements in the central bank’s preferred measures of underlying price pressures, though these figures remain well above the 2% target. Financial markets currently see limited potential for additional tightening by the Bank of Canada and have begun to anticipate a rate cut by June.