A regulatory government agency has weighed in on reports of mortgage amortizations spanning decades longer than the typical 25 years, saying those projections do not reflect a borrower's actual repayment period and do not change a borrower's contractual obligations
On Wednesday, the Office of the Superintendent of Financial Institutions (OSFI) published a statement addressing reports of long-extended amortizations for individuals with variable-rate products and fixed payments – saying these reports are “not entirely accurate” and don’t reflect the actual timeline someone will be expected to pay back their loan.
“These kinds of projected amortizations are not realistic and do not represent what a borrower’s actual repayment period will be. Importantly, they do not change the borrower’s contractual amortization,” OSFI said in the statement posted to its website.
“Rather, they are hypothetical calculations of the amortization period which assume the borrower continues making the same fixed payments for the duration of the loan, with the current interest rate.”
OSFI is an independent federal agency that oversees federally regulated financial institutions, including Canadian banks, to ensure they are in adequate financial condition.
OSFI said the projected amortization periods do show how changes in interest rates can influence the repayment of loans.
The agency added that if renegotiating a mortgage entails extending the amortization beyond the period that had been agreed to, it is considered a refinance.
REALITY CHECK FOR BORROWERS
Amid heightened interest rates and other economic pressures, some Canadians are beginning to stretch their mortgage repayment periods beyond 25 years – some for periods as long as 90 years, one expert told BNNBloomberg.ca earlier this year.
Daniel Vyner, the principal broker at DV Capital, told BNNBloomberg.ca that OSFI has now taken the public position that lengthy mortgage borrowing periods are not an accurate reflection of someone's repayment period – and that could be a reality check for some borrowers.
“Even though some of these amortizations are stating that some of them have been extended to 70 years or more, these aren't realistic and it doesn't truly represent the borrower's actual repayment period,” Vyner said in a Thursday interview.
Despite the extended amortization periods, Vyner said the bottom line is that “the extend and pretend days are coming to an end at maturity.”
OSFI’s comments should provide some consumers with clarity regarding their mortgage loans, Vyner said. The agency’s statement may eliminate the misconception some consumers may hold that their bank will not be “taking action at renewal,” he added.
“I think … (OSFI) wants to eliminate the perception that consumers are able to have these extended amortizations indefinitely,” he said.
He said it's important for these borrowers to get ahead of the issue and discuss it with their lender.
“Some homeowners may be caught off guard with the fact that amortizations need to be reset at renewal,” Vyner said.
“This notice from OSFI … reinforces this requirement (and) reinforces this reality.”
WHAT CAN BORROWERS DO?
According to OSFI, borrowers who fall into this category can take actions to “manage their debt loads” amid elevated interest rates. Options include increasing mortgage payments, making lump sum payments and renegotiating their mortgage, OSFI said.
Vyner said he is unsure how many borrowers would be able to increase their mortgage payments, as OSFI has suggested. He also highlighted that the window for renegotiation is slim and would likely be “taking a sliver” off the current interest rate.
“They’re not dropping the rates down to nothing,” Vyner said.