OSFI’s view: Variable rate mortgages with fixed payments and extended amortizations

The Office of the Superintendent of Financial Institutions (OSFI) would like to address recent reports of mortgages with extended amortizations. (i.e., extending the length of time permitted to pay off the mortgage). These reports have specifically focused on Variable Rate Mortgages with Fixed Payments (VFM) and have often suggested that amortizations for these mortgage products have been extended by several decades. In our view, these reports are not entirely accurate.

First, we point out that changes in interest rates do not change the contractual amortization period in the borrower’s VFM loan contract. For example, when a borrower enters into a VFM contract with an amortization period of 25 years, that contractual amortization period of 25 years remains intact for the duration of the loan, regardless of interest rate changes.

When lenders provide borrowers with mortgage statements, however, they often include a hypothetical amortization period based on a number of factors, including the remaining principal, the anticipated future payments, and the current interest rate. This calculation has, for some borrowers, projected amortization periods of 70 or more years, or in some cases an infinite amortization period. 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.

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. While the borrower needs to keep making the same fixed payments for the term of the loan, the current interest rate will inevitably vary over the life of the mortgage.

Still, these projections show how shifts in market interest rates—especially large, rapid ones—can influence loan repayment. This highlights the importance of lenders adequately testing borrowers’ repayment capacity with the Minimum Qualifying Rate (MQR), also known as the “stress test”, for a range of financial and economic conditions before loans are granted. After the loan is granted, we expect lenders to take early actions, including proactive outreach to vulnerable/impacted borrowers.

Borrowers can also take early actions to manage their debt loads during periods of high or rising interest rates. Those early actions could include:

• increasing mortgage payments
• making lump sum payments
• renegotiating their mortgages

While there are some conditions under which lenders can and do extend contractual amortization periods, in most circumstances lenders will restore borrowers to their contractual amortization period.

When this happens, a VFM borrower may face a significant increase in their mortgage payments. Borrowers may choose to respond by making a lump-sum payment or renegotiating the mortgage to reduce their mortgage payments.

If renegotiating a mortgage involves extending the contractual amortization beyond the previously agreed upon period, this is a refinancing. This means lenders should apply OSFI’s Guideline B-20 expectations when underwriting the loan, including the MQR. Lenders should also adhere to the key principles in the Financial Consumer Agency of Canada’s (FCAC’s) Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances.