The Financial Consumer Agency of Canada (FCAC) released new guidelines to better protect Canadians at risk of defaulting on their mortgage. What are the new guidelines and are they helpful to most Canadian homeowners? Read on to find out.
The New FCAC Mortgage Guidelines to Protect Homeowners
Higher mortgage rates coupled with higher costs of living are stretching most Canadian household budgets thin.
To better address this, the FCAC says that homeowners with existing mortgages who are experiencing severe financial distress should have access to all available relief measures. Those relief measures include waiving prepayment penalties, internal fees and cost, not charging interest on interest and extending the amortization.
Making Canadian Financial Institutions More Accountable
It’s not a one size fits all solution. It’s on a case-by-case basis. Financial institutions are supposed to provide tailored support to those most at risk.
But that’s not all. Canadian financial institutions are supposed to proactively monitor homeowners for early signs of severe stress. They are also supposed to keep records of any homeowners they have contacted with concerns about their ability to make their mortgage payments.
To make the financial institutions offering mortgages accountable, the FCAC says that they should have a formal complaint handling process. If homeowners don’t feel like their complaint is adequately addressed, they can escalate it to an external third party to investigate further.
How Did We End Up Here?
These new guidelines are necessary because the Bank of Canada really dropped the ball when it comes to its messaging surrounding interest rates.
In July 2020, Bank of Canada Governor Tiff Macklem assured Canadians that borrowing rates would remain at historic lows for a “long time.”
As reported by BNNBloomberg at the time, Macklem said, “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.”
The Bank of Canada then proceeded to increase interest rates by four percent just two years later, representing the fastest interest-rate increases we have seen in decades.
I don’t know about you, but two years doesn’t seem like a “long time.” Many Canadians signed up for variable rate mortgages based on our central bank’s assurance that rates would remain low for a long time, leaving them in a financial bind.
As of their October 2024 meeting, the Bank of Canada cut the key interest rate to 3.75% after a few rate cuts.
The Canadians Paying Variable Mortgage Rates
The ones who are struggling the most now are those with variable mortgage payments. With that type of mortgage, the payment automatically adjusts with changes in the lender’s prime rate. However, they aren’t the only ones struggling.
Those with fixed payments on variable rate mortgages are seeing a large portion of their payments going towards interest. Some are even facing negative amortization. These new guidelines are meant to address that so that these borrowers don’t fall through the cracks and face a huge jump in their mortgage payments when their mortgage comes up for renewal.
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The Path Forward
Mortgage delinquency rates remain near historic lows in Canada because Canadians find a way to make their mortgage payments. Whether it’s taking on a second job, borrowing from family, or using their line of credit. However, there’s only so much belt tightening Canadians can do.
The new guidelines mean to help Canadian homeowners who can’t make their mortgage payments despite doing all the above. These are welcome, but it’s a lot like the old saying, closing the barn door after the horse has bolted. The new guidelines would have been nice months ago.
