A new charter codifying the relief that lenders must offer financially strapped mortgage borrowers is drawing mixed reviews from market watchers, with some warning that elements of the policy will prolong overheated housing market conditions and add upward pressure on interest rates.

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Liberals' mortgage charter draws praise and warnings as renewal cliff looms Back to video

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The charter was among a suite of housing affordability measures unveiled Nov. 21 by Finance Minister Chrystia Freeland as part of the federal government’s fall economic update, and comes as a looming mortgage cliff will see more than two million home loans up for renewal over the next two years.

Under the Canadian Mortgage Charter, lenders will have to contact homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options, which must include the ability to make lump sum payments to avoid negative amortization and the option to sell their principal residence without a prepayment penalties. Lenders will also be required to offer temporary extensions of amortization periods for mortgagors  at risk and to waive any fees and costs for doing so. In addition, banks won’t be able to charge “interest on interest” if a borrower is temporarily in a period of negative amortization, which means they are covering just the interest without paying down any principal.

The charter also provides relief for insured borrowers from a mortgage stress test if they switch banks to renew, a move intended to increase competition among lenders and ease the pain of renewals over the next couple of years amid higher interest rates.

While some observers praised the government for recognizing that Canadians are struggling with the sharpest interest rate increases in 40 years, others, such as economist David Rosenberg, who predicted the U.S. housing meltdown in 2008 when he was at Merrill Lynch, warned unintended consequences could prolong the pain.

“It’s important to see that the government is recognizing that Canadians are feeling some pressure and stress in regard to the speed at which interest rates increased and the differential they may be paying upon renewal,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd.

A Manulife Bank survey released Nov. 22 found that one in three homeowners with a mortgage anticipates a potential forced home sale if interest rates increase, while fewer than two in five feel financially prepared to weather further interest rate hikes.

Rosenberg acknowledged the issues facing consumers amid high inflation and interest rates but criticized the mortgage charter as a means to deal with overextended borrowers, saying that while the relief measures would undoubtedly support borrowers, the charter runs the risk of “creating perverse incentives and unintended consequences in a sector deeply in need of correction.”

Letting borrowers have extended amortizations and other fee and payment relief risks “prolonging the correction in the housing market and favour(s) existing mortgage holders remaining overextended at new buyers’ expense,” he wrote in a Nov. 22 note to clients of Rosenberg Research & Associates Inc.

Kicking a reckoning down the road will also “potentially force the Bank of Canada to keep its policy stance tighter than desired,” Rosenberg said.

Ottawa-based mortgage broker Chris Allard praised some aspects of the mortgage charter, saying the removal of the stress test for some homeowners who wish to shop around between financial institutions when renewing their mortgages is a positive development that should make renewal rates more competitive. The stress test that would have been required at the new institution would force borrowers to qualify at a much higher monthly mortgage rate than they did at their current financial institution, incentivizing them to stay put and take whatever rate the current lender offered.

“There was always fear from borrowers that they (would) have to sign at a less favourable rate simply because they don’t qualify to go somewhere else,” Allard said, noting that it was already possible for some borrowers to transfer a mortgage from one lender to another with no stress test, but only those who had mortgage insurance in place prior to October 2016.

Freeland’s fall economic statement included other measures targeting housing supply and affordability, including committing more than $25 billion in low-cost financial to incentivize the build of more than 71,000 new rental homes in Canadian cities through the Rental Construction Financing Initiative.

“Our country needs more homes and we need more of them fast,” Freeland said in the House of Commons as she delivered the economic update.

• Email: bshecter@postmedia.com

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