MNI: Canada Bank Regulator Ups Mortgage Payment Shock Warning

Canada's bank regulator said Thursday higher borrowing costs are squeezing mortgage borrowers and commercial real estate, noting some households face "a significant payment shock" when refinancing after reaching a trigger rate where monthly payments no longer cover the interest burden on the loan.

The Office of the Superintendent of Financial Institutions updated its annual risk outlook from April, saying it has the discretion for a follow-up "if risks in the financial system substantially evolve." Signs of weakening credit quality represent a major development since then, the report said.

One area of concern is variable-rate, fixed payment mortgages, OSFI said. "There is a common misperception that these mortgages’ amortization period extends" when the trigger rate is breached, the report said. "In fact, the contractual amortization period does not change. And mortgagors will have to make up the deferred principal paydowns when they renew. This means they are at risk of suffering a significant payment shock." The agency also said it will announce results of its mortgage stress test review Dec. 12. (See: MNI INTERVIEW: BOC Can Wait On Rate Hike- UofT Researcher)