(Reuters) – Canada’s banking regulator on Tuesday proposed changes to capital adequacy guidelines for lenders and insurers to help them manage mortgage risks better.
The Office of the Superintendent of Financial Institutions (OSFI) said changes to the guidelines for capital adequacy requirements (CAR) and mortgage insurer capital adequacy test (MICAT) will leave lenders with more capital to tackle risks related to mortgages in negative amortization.
Negative amortization is a situation in which the amount that borrowers owe keeps rising as their payments are not enough to cover the due interest.
“The proposed changes should encourage banks to lessen the number of mortgages that would otherwise go into negative amortization,” OSFI said.
A record pace of interest rate hikes in Canada has led to the repayment period for many variable rate mortgages extending to more than 30 years, helping shield households from higher borrowing costs but raising debt loads and worrying regulators.
The regulator has sought feedback on its proposals by Sept. 1, and said the changes would not lead to an increase in monthly payments for consumers.
