Bank of Canada voices concerns about variable rate mortgage products -Bloomberg News

Senior Deputy Governor of the Bank of Canada Carolyn Rogers takes part in a press conference in Ottawa, Ontario, Canada October 25, 2023. REUTERS/Patrick Doyle/File Photo Acquire Licensing Rights
Nov 3 (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.