The Bank of Canada cautioned Thursday that many homeowners who took out mortgages during the pandemic, when interest rates were virtually nonexistent, may soon have to cope with the fallout when those loans mature.
Published Wednesday, the most recent risk outlook from the Office of the Superintendent of Financial Institutions names one of the greatest risks to the financial system as the "repayment shock" that certain borrowers are currently going through.
76% of home mortgages in existence as of February will be up for renewal by the end of 2026, according to the regulator. Still worse are the 15% of mortgages with variable interest rates and fixed payments. The principal balance of some of these loans is rising because interest rates have risen too quickly and the regular payments are no longer fully paying the interest expense. These loans suffer negative amortization.
In the end, the regulator said, these debtors will have to pay much more each month or make one large payment.
"We expect increases in payments to raise defaults or delinquencies on residential mortgage loans," said OSFI.
Housing risks have long been a concern for Canadians due to rising house prices, rising interest rates, and inflation that lowers take-home pay.
According to the study, the labor market is still relatively strong even if any decline could significantly change the risk climate.
The Bank of Canada has been offering benchmark overnight lending rates of 5% since late July, the highest in over 20 years. This is significant because many Canadians have mortgages whose interest rates are based on the central bank rate. For many families, financial burden will grow the longer rates remain high.
Additionally listed in the OSFI evaluation as potential system problems were wholesale credit and liquidity as well as security risks from hostile foreign actors. The regulator voiced concern about the way fraud and money laundering were eroding the security and integrity of financial institutions.
Worries about foreign influence will be addressed by the regulator through a recently established group tasked with ensuring banks and other financial institutions tackle threats to national security.
