Bank of Canada Deputy Governor Carolyn Rogers attends a press conference in Ottawa, Ontario, Canada on October 25, 2023. REUTERS/Patrick Doyle/File Photo Acquire License Rights
Nov 3 (Reuters) – The Bank of Canada has urged banks to reconsider offering variable-rate, fixed-payment mortgages amid concerns about the number of borrowers facing negative repayment on their loans .
“I think this product needs to be closely scrutinized, and I think it will be scrutinized,” Lt. Gov. Carolyn Rogers said in an interview with Bloomberg News on Friday. “I think the industry will think about how much they want to offer this product,” she added
Many variable rate mortgages in Canada require borrowers to make regular payments in fixed amounts. So when interest rates rise, more of the payment goes toward paying interest on the loan rather than paying off the principal, extending the payback period.
The Bank of Canada’s rapid pace of interest rate hikes since last year has led to negative amortization on some mortgages, which occurs when the interest on a loan exceeds the fixed principal payment – causing borrowers to increase repayments on their loans.
“It’s worrying. You don’t want a large portfolio of negative amortization mortgages,” Rogers said. “It’s not good for the banks and it’s not good for the mortgage holders.”
On monetary policy, Rogers said: “A rate hike is on the table until we are really confident that we are clearly on track” to lower core inflation toward the target.
The latest inflation data for September showed some progress on the central bank’s preferred measures of underlying price pressures, but they remained well above the 2% inflation target.
The money markets see little chance of further tightening by the BoC and have priced in a rate cut by June.
Reporting by Fergal Smith in Toronto and Gursimran Kaur in Bengaluru. Editing by Chris Reese and Leslie Adler
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