(Reuters) -Canada’s banking regulator on Tuesday proposed changes to capital adequacy guidelines that would require lenders and mortgage insurers to hold more funds to better manage risks from a sharp rise in home loan rates.
Variable home loan rates have risen as the country’s central bank has hiked benchmark interest rate to a 22-year high of 4.75% in its bid to tame inflation.
Some of Canada’s top lenders have given customers the option to extend their home loan amortization period beyond 30 years, while keeping their monthly repayment commitments the same, shielding them from a jump in borrowing costs. But higher overall debt load has got regulators worried.
The Office of the Superintendent of Financial Institutions (OSFI) told Reuters in June that lenders should manage such risks as soon as possible.
Proposed changes to the guidelines for capital adequacy requirements and mortgage insurer capital adequacy test “should encourage banks to lessen the number of mortgages that would otherwise go into negative amortization,” OSFI said on Tuesday.
Negative amortization is a situation in which the amount that borrowers owe keeps rising as their payments are not enough to cover the due interest.
More than 20% of the mortgage portfolio of the big six Canadian banks had a repayment period of over 30 years in the first quarter, according to Desjardins analyst Royce Mendes.
If interest rates stay high over the next few years, as the central bank has warned, it would impede customers’ ability to service debt at higher rates during renewals.
The regulator has sought feedback on its proposals by Sept. 1, and said the changes would not lead to an increase in monthly payments for consumers.
(Reporting by Savyata Mishra in Bengaluru Editing by Vinay Dwivedi)