How Will the Canada ‘mortgage charter’ Impact Homeowners, Bank Earnings?

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This weeks’ federal fiscal update unveiled Ottawa’s plans for a “mortgage charter” aimed at assisting distressed borrowers – something stakeholders and experts say could impact bank earnings as well as providing relief for stretched Canadian homeowners.

MORTGAGE CHARTER EXPLAINED

The charter will build on existing guidance and expectations for how financial institutions work with borrowers, the government said, adding that the charter will work to ensure Canadians are aware of relief measures.

“These measures will support more Canadians through the temporary financial stress caused by elevated interest rates and help them stay in their homes,” the government said in the economic update.

It lays out 6 relief measures, including:

Allowing for temporary extensions of amortization periods for at-risk mortgage holders.
Lenders will waive fees and costs that “would have otherwise been changed for relief measures.”
When borrowers switch lenders at renewal, financial institutions must not require insured mortgage holders to requalify under an insured minimum qualifying rate.
Financial institutions need to contact homeowners four to six months ahead of a mortgage renewal and make them aware of their options.
At-risk homeowners will have the ability to make “lump sum payments” without prepayment penalties to avoid a negative amortization or sale of their principal residence, according to the charter.
Lenders must not charge interest “in the event that mortgage relief measures result in a temporary period of negative amortization.”

The government said it will monitor financial institutions’ compliance with the relief measures.

MORTGAGE AFFORDABILITY A ‘HUGE STRESSOR’

Chartered Professional Accountants of Canada (CPA Canada) said it was “happy” to see the federal government setting out a guideline for banks to help consumers impacted by higher interest rates, noting that mortgage affordability becomes a “huge stressor” for financially pinched Canadians who are set to renew.

“The mortgage charter will provide a framework and guidance for Canadian banks to help alleviate financial pressures for homeowners, allowing them to stay in their homes and afford their payments, if followed,” Li Zhang. director of financial literacy at CPA Canada, said in a written statement.

Alexandra Flynn, an associate professor and director of the University of British Columbia’s Housing Research Collaborative, told BNNBloomberg.ca that the lack of secure and affordable rental units requires people take on expensive mortgages to gain housing security.

“As a result, these homeowners are suffering in the wake of higher interest charges,” she said in an emailed statement.

“The mortgage charter… will not solve the problem, but only temporarily ease a symptom. Instead, we need is serious investment in housing security and rental homes, so Canadians are not forced into mortgages they can’t afford.”

IMPACT ON BANKS

An analysts’ note from TD Cowen highlighted the potential effects of a mortgage charter on financial institutions.

TD Cowen managing director Mario Mendonca and equity research associate Marcel Mclean said the “broad principle” of the proposed charter is that mortgage owners facing distress from rising interest rates should receive “reasonable relief from lenders.”

“Interest accruing from mortgage relief is still an asset on a bank’s balance sheet, but in this case, it is an asset not earning anything for the bank,” they wrote in the note to clients.

“We believe this will necessarily lead to lower (net interest margin) in the banks’ Canadian (personal and commercial banking) segments and weaker earnings. At this time, we are not capable of quantifying the impact.”

The length of time that lenders provide relief will be a significant factor in determining if the charter will have a material impact on bank earnings and earnings growth, the analysts noted.

IMPLEMENTATION ISSUES

The TD Cowen analysts believe the charter will have issues surrounding its implementation, though the changes it proposes are “meaningful.”

“In our view, the final measure is meaningful. Banks are instructed to not charge interest on interest in the event the mortgage relief provided under the charter results in temporary

negative amortization,” the analysts said in their note.

The measure will have “material implementation issues,” the analysts said, as it may not always be apparent if a relief measure caused a negative amortization, or it was “built into the mortgage construct,” like in variable rate mortgage products with fixed payments.

ALREADY IN PRACTICE?

Former interim Conservative leader Rona Ambrose, told BNN Bloomberg recently that the mortgage charter will be beneficial, though she said many of its measures may be already carried out in practice.

“It goes without saying that banks are doing all of this stuff already … but I think what the government is saying is ‘Look, we’re going to hold you to it, banks,’” Ambrose said.

“They’re setting out this expectation, which – I think – is a positive thing and probably is already happening.”

Ron Butler, mortgage broker at Butler Mortgage, took to social media platform X to say he views the mortgage charter as “old news repackaged for added political theatre.”

He said most banks already provide notice to clients well in advance of a mortgage renewal.

Butler added that extended amortization on renewals for borrowers experiencing financial hardship has already been occurring for over a year now, and argued that financial institutions have always allowed lump sum payments.