Financial Risks Loom for Homeowners: Bank Regulator in Canada Alert

The Office of the Superintendent of Financial Institutions (OSFI) issues a warning about potential financial risks for homeowners with pandemic-era mortgages.

Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), has issued a warning regarding the potential financial risks faced by homeowners who took out mortgages during the pandemic when interest rates were at historic lows. According to the latest risk outlook from OSFI, the looming “payment shock” for many borrowers is one of the most significant risks currently present in the financial system.

The report highlights that 76 per cent of outstanding residential mortgages as of February will be up for renewal by the end of 2026. Of particular concern are the 15 per cent of mortgages with variable rates and fixed payments, some of which are negatively amortizing. This means that the regular payments no longer cover the full interest costs, leading to an increase in the principal balance. As a result, borrowers may face lump-sum payments or significantly higher monthly payments in the near future.

OSFI anticipates that these payment increases could result in a higher incidence of residential mortgage loans falling into arrears or defaults. This comes at a time when Canadian households are already grappling with high home prices, elevated interest rates, and increasing inflation levels that are eating into their take-home pay.

The Bank of Canada’s benchmark overnight lending rate has been at 5 per cent since last July, the highest level in over two decades. This is significant as many Canadians have mortgages tied to this central bank rate. The prolonged period of elevated rates could further strain household finances.

The superintendent of financial institutions likened the issue of variable-rate mortgages with fixed payments to a “mouse in the snake,” acknowledging that while banks and borrowers are managing the problem, there is still a risk of significant losses if not addressed promptly. OSFI’s report also highlighted security risks from hostile foreign actors, wholesale credit, and liquidity as potential threats to the financial system.

To address these concerns, OSFI plans to establish a new group tasked with ensuring that banks and financial institutions mitigate threats to national security. By proactively addressing these risks, OSFI aims to safeguard the integrity and security of the financial system.

The warning issued by OSFI serves as a reminder of the challenges faced by Canadian homeowners as interest rates rise and mortgage renewals approach. It underscores the importance of proactive risk management and early action to mitigate potential financial strains on households.