(Reuters) -The Bank of Canada has urged banks to reconsider offering variable rate mortgages with fixed payments, concerned about the number of borrowers faced with negative amortization of their loans.
“I think that product needs a close look and I think it’ll get a close look,” Senior Deputy Governor Carolyn Rogers said in an interview with Bloomberg News on Friday. “I think you’ll see the industry reflect on how much they want to offer that product,” she added
Many variable rate mortgages in Canada require borrowers to make regular payments in fixed amounts. So when interest rates rise, a greater share of the payment goes toward paying interest on the loan rather than paying down the principal, resulting in the amortization period being extended.
The rapid pace of interest-rate hikes by the Bank of Canada since last year has pushed some mortgages into negative amortization, which occurs when interest on a loan exceeds the fixed payment on the principle -- resulting in borrowers adding to the principle on their loans.
"It is concerning. You don’t want a big portfolio of negative amortizing mortgages," Rogers said. "It's not good for the banks and it's not good for the mortgage holders."
On monetary policy, Rogers said, "A rate hike is on the table until we are really confident that we are clearly on our way" toward lowering core inflation toward target.
The latest inflation data, for September, showed some progress on the central bank's favored measures of underlying price pressures, but they remained far above the 2% inflation target.
Money markets see little chance of further tightening by the BoC and have moved to price in a rate cut by June.
(Reporting by Fergal Smith in Toronto and Gursimran Kaur in BengaluruEditing by Chris Reese and Leslie Adler)