The head of Canada’s banking regulator says he is encouraged by the progress Canadian lenders have made in shortening mortgage amortization periods across their lending portfolios.
Over the course of the pandemic, mortgage originations soared by over 40% compared to pre-pandemic levels, with many borrowers taking rock-bottom variable-rate mortgages that came with fixed payments.
As interest rates soared, the interest portion of those payments also rose, in many cases reaching a trigger point that consumed the borrower’s total monthly payment, and pushing amortization periods well beyond 35 years in many cases.
But last week, Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), reported that banks have made good progress in getting those amortizations back down to their original levels.
He noted that federally regulated lenders now hold roughly $220 billion worth of mortgages with amortization periods exceeding 35 years, down 27% from nearly $300 billion at its height.
“Notwithstanding that risk, I’ve been pleasantly surprised at how Canadians and their lenders continue to manage it down,” Routledge said while speaking at the National Bank of Canada financial services conference. “That’s a really good sign and I’m encouraged by that.”
Routledge’s remarks show a more optimistic outlook compared to previous comments he has made in which he took aim at fixed-payment variable rate mortgage products and the risks OSFI says they pose to the financial system.
In his November testimony before the Standing Senate Committee on Banking, Routledge expressed significant concerns about fixed-payment variable rate mortgage products, describing them as “dangerous.” He suggested that the market would benefit from a decrease in the prevalence of these types of mortgages.
Of Canada’s Big 6 banks, RBC, TD, BMO and CIBC offer fixed-payment variable rate mortgages, though RBC doesn’t allow negative amortization. As we reported from the first-quarter earnings, the banks have seen amortization periods continue to normalize over the past year.
For example, RBC reported that the percentage of its mortgages with amortizations beyond 35 years was down to 20% of its portfolio from a peak of 26%. Similarly, BMO said its share of extended amortizations fell to 24.7%, down from nearly 33% a year earlier.
In other news…
Federal budget measures aimed at helping renters become homeowners
Last week, Prime Minister Justin Trudeau unveiled several initiatives in the upcoming federal budget aimed at making homeownership more accessible to renters.
These include:
- Tenant Protection Fund: A $15 million allocation aimed at bolstering legal aid and advocacy for renters, enhancing tenant rights and access to justice.
- Canadian Renters’ Bill of Rights: An initiative that seeks to establish standardized rental practices across Canada, ensuring fair treatment and clearer rights for renters.
- Making rent count towards credit scores: Amendments to the Canadian Mortgage Charter that are designed to recognize rental payment history as part of credit scoring, potentially easing the path to mortgage qualification for renters. (More on that here)
Initial reaction to the measures have largely been positive, including from Mortgage Professionals Canada.
“MPC is pleased to see that the federal government has heard our recommendations to facilitate access to home ownership,” it said in an email to members. “While more work remains to be done, these measures represent a significant step in the right direction, creating an easier pathway to homeownership particularly for Gen Z, Millennials, and new Canadians with little credit history.”
In its own statement, the Canadian Bankers Association said it works collaboratively with government to explore new ways to serve Canadians and will assess the impact of the new measures once more details are unveiled.
94% of business leaders say housing is the biggest risk to the economy
An overwhelming majority (94%) of business leaders believe housing is the biggest risk to the economy, a new survey from KPMG has found.
Another 81% of Canadian business leaders say the high cost of housing and lack of supply are hindering their ability to attract and retain talent.
“New and young Canadians are being shut out from purchasing and are finding rentals scarce and costly,” Caroline Charest, an economist and Montreal-based partner at KPMG, said in a statement. “Those who were able to enter the market a few years back due to record low interest rates now face the risk of default when their rates reset at upwards of three times what they pay now.”
Charest adds that this is “weighing heavily on business leaders struggling to attract and retain key personnel and talent,” particularly in large urban areas that are seeing the most acute housing shortages and highest costs of housing.
The survey found that business leaders want to see more innovating solutions to solving the housing crisis, with 89% believing public-private collaboration will be needed.
Another 85% of leaders believe the government needs to introduce “innovative, repayable tax measures” to provide relief to homeowners facing payment shocks at renewal in order to prevent a rise in defaults.
Last-minute pause for bare trust tax filing amid confusion
Just days before the 2023 tax filing deadline for bare trusts, the Canada Revenue Agency has announced a pause on reporting requirements amid confusion over the new rules.
“In recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians, the Canada Revenue Agency will not require bare trusts to file a T3 … for the 2023 tax year, unless the CRA makes a direct request for these filings,” the tax agency said in a release.
Bare trusts, which aren’t specifically defined under the Income Tax Act, are a type of trust where the trustee holds property or assets for the beneficiary without any additional duties, powers or obligations. The trustee’s role is to hold title to the property, but all rights and responsibilities of ownership are exercised by the beneficiary.
As part of the government’s newly announced Underused Housing Tax (UHT), which levies a 1% annual tax on foreign-owned residential properties considered underused or vacant, Canadians who own property through partnerships or trusts may be required to file a UHT tax return in order to obtain an exemption from paying the tax.
The CRA said it will “work with the Department of Finance to further clarify its guidance on this filing requirement” and that it will communicate with Canadians “as further information becomes available.”
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