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Banks reducing ultra-long mortgages, Canada watchdog says

Amidst the turbulent waves of the pandemic, mortgages in Canada surged, posing what the country’s bank watchdog terms as a “pocket of risk” to the financial stability. However, there's a glimmer of hope as Canadian lenders are beginning to address the issue of ultra-long mortgages, according to the Office of the Superintendent of Financial Institutions (OSFI).

Peter Routledge, leading the charge at OSFI, expressed concerns about the surge in mortgage underwritings during the Covid era. He highlighted that this buildup posed a concentration of risk in the financial system. Despite this, he reassured that it's not yet a systemic risk but rather a localized one, which could induce uncertainty in the housing sector.

During the peak of the housing market frenzy, banks doled out a staggering 40 percent more home loans compared to pre-pandemic levels. Of these, an alarming half were variable-interest rate mortgages, a significant uptick from the typical quarter. However, Routledge acknowledged the efforts of Canadians and their lenders in mitigating this risk.

The latest figures reveal a positive trend. Canadian lenders have managed to trim down the volume of mortgages with extended amortization periods, which are loans with durations longer than the standard 35 years, by 27 percent. This reduction, amounting to approximately $80 billion, signals progress in managing the risk associated with prolonged mortgages.

Routledge’s recent remarks exude a more optimistic outlook compared to his previous warnings about the perils of variable-rate mortgages. He had previously voiced concerns about the risks posed by mortgages with fixed monthly payments but variable interest rates, branding them as "dangerous" during a government hearing.

Three major lenders, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, and Bank of Montreal, were noted for offering negatively amortizing mortgages, where the portion of monthly payments allocated to interest can surpass the principal. However, recent data suggests a decline in the prevalence of such mortgages, indicating a proactive approach by lenders to address risky products.

While Routledge refrained from explicitly emphasizing the risks associated with negatively amortizing mortgages during his recent interview, his prepared remarks hinted at a preference for their reduced prevalence in the housing market. This signals a growing awareness among regulators and lenders regarding the importance of maintaining stability in the housing sector by curbing risky mortgage products.