Risks for Borrowers with Variable and Coming Due Fixed Rate Mortgages: The Importance of Proactive Relief Measures

Borrowers most at risk are those with variable rate mortgages as well as those with fixed rate mortgages coming due.

Under the pressure of financial difficulties, some may even be forced to increase their borrowing for daily expenses or dip into their savings.

Frank Lofranco, FCAC’s Assistant Commissioner for Supervision and Enforcement, called on financial institutions to proactively monitor and contact consumers at risk to offer them appropriate relief measures before the situation gets bogged down.

The federal watchdog expects financial institutions to consider relief measures, including waiving prepayment penalties, waiving internal fees and costs, not charging interest on interest and extension of the amortization period.

This last measure is likely to become more and more popular, but it is not without financial consequences, warns Philippe Simard, mortgage director in Quebec at Ratehub.ca.

The agency published data showing the significant impacts of extending the amortization period on a loan of $500,000 at a rate of 5.50%. For a loan amortized over 30 years, the interest paid would amount to $556,153, compared to $448,196 over 25 years. That’s over $100,000 coming out of the borrower’s pockets.

“The guidelines specify that [institutions financières] should only extend amortizations for the shortest period possible and take into consideration the borrower’s financial ability to return to their original amortization schedule. Given that the financial consequences of a larger mortgage loan over a longer period of time are considerable, this is a positive measure to inform borrowers and ensure that they understand their options,” underlines Philippe Simard.