By Robb M. Stewart
The Office of the Superintendent of Financial Institutions (OSFI) in Canada has announced tighter guidelines for home loans, requiring banks and mortgage insurers to hold more capital for loans that have payments which do not cover the interest portion. The changes aim to align with the increased risks associated with growing mortgage balances due to elevated interest rates.
The adjustments to the buffers held for negatively amortizing mortgages will not result in an increase in monthly payments for consumers with existing mortgages, according to the OSFI. These revised capital guidelines will come into effect at the start of the next fiscal quarter, which is January 1st for most institutions. However, for major banks, the effective date will be from this November.
In recent times, interest rates have risen rapidly, leading to the central bank setting its benchmark policy rate at 5%, the highest rate seen in 22 years. Just last year, the rate stood at 0.25%. The Bank of Canada policymakers are slated to meet next week to decide on rates.
The OSFI stated that it has also made other revisions to its guidelines in order to clarify how banks and insurers should apply rules on capital. Peter Routledge, Superintendent of Financial Institutions, expressed his belief that these incremental changes enhance the resilience of Canada’s financial system. He further added that these updates are aimed at promoting prudent capital allocation against the risks taken by lenders and insurers.