Finance Committee on June 15th, 2023

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 97 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, June 8, 2023, the committee is meeting to discuss the impact of inflation and interest rates on mortgages in Canada.

Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely using the Zoom application.

I'd like to make a few comments for the benefit of the witnesses and members.

Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mike and please mute yourself when you are not speaking. There is interpretation for those on Zoom. You have the choice, at the bottom of your screen, of floor, English or French. For those in the room, you can use the earpiece and select the desired channel. I remind everyone that all comments should be addressed through the chair.

For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as well as we can, and we appreciate your patience and understanding in this regard.

Just as a housekeeping item here, we did distribute a budget before this meeting. I hope all members received that. I'd like to just see if we could adopt that budget before we get going. It was for $7,350. Could I just see a thumbs-up?

[Some hon. members]

Agreed.

[The Chair, Liberal, Peter Fonseca]

That's great. It's adopted.

Now I'd like to welcome our witnesses. With us today from the Department of Finance, we have Matthew Emde, senior director, demand and labour analysis, economic analysis and forecasting division, economic policy branch. We have Rachel Grasham, senior director, housing finance, financial stability and capital markets division, financial sector policy branch; and Robert Sample, director general, financial stability and capital markets division, financial sector policy branch. We also have Julie Turcotte with us, who is the acting assistant deputy minister, economic policy branch.

My understanding is that Mr. Sample will give some opening introductory remarks for the group, and then we will get to members' questions.

Mr. Sample, go ahead.

[Robert Sample, Director General, Financial Stability and Capital Markets Division, Financial Sector Policy Branch, Department of Finance]

Thank you very much.

We are pleased to be here to speak with you today. I have a couple of opening remarks on behalf of the department and my colleagues Julie, Rachel and Matt.

We're here to help you with your study on the impacts of inflation and increased interest rates on mortgages in Canada, particularly with respect to variable rate mortgages. These are important issues from a consumer and housing affordability perspective and also from an economic resiliency, prudential and financial stability perspective.

The department is actively monitoring this issue as well as broader housing market developments. We are working with federal financial sector agencies that have a role in housing finance and consumer, prudential and financial stability issues. This includes the Office of the Superintendent of Financial Institutions, or OSFI, as the independent prudential banking regulator; the Bank of Canada, which includes its responsibility for monetary policy and financial stability; the Financial Consumer Agency of Canada, or the FCAC, from a consumer protection perspective; and also the Canada Mortgage and Housing Corporation, or the CMHC, given its role as a mortgage insurer and its broader responsibility vis-à-vis housing affordability in Canada.

There are a number of recent public documents I will point the committee's attention to that are germane to your study. First, OSFI recently undertook a public consultation on its mortgage underwriting guideline B-20. Next, the FCAC recently concluded consultations on a new guideline on mortgage hardship. Also, the Bank of Canada recently issued its financial system review, which it does annually, on current vulnerabilities, including with respect to households and the housing market.

I understand that our federal partners and Canadian financial institutions have been asked to appear before this committee and will be able to provide you with more detailed information with respect to their areas of interest and accountability. I can, however, offer some context on the mortgage underwriting framework to help frame our discussion and some issues that I understand are of interest to this committee.

First, there are different roles, regulation and oversight between our insured and uninsured mortgage markets. For the the insured mortgage market, under the Bank Act, mortgages originated by a federally regulated financial institution with less than 20% down payment are required to have mortgage default insurance. The Minister of Finance sets the minimum amount underwriting rules for mortgage default insurance eligibility. These include the minimum qualifying rate, minimum down payment, minimum credit score and maximum debt service ratio and amortization limits. These requirements are set out in regulations.

Mortgage default insurance is guaranteed by the Government of Canada. This support allows borrowers to purchase a house with a lower down payment and typically at a lower interest rates. The maximum amortization period for an insured mortgage is currently 25 years.

For uninsured mortgages, OSFI's guideline B-20 sets out expectations for prudent residential mortgage underwriting. Guideline B-20 is applicable to all federally regulated financial institutions engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. As noted, OSFI is currently reviewing the guideline B-20.

I would like to draw to your attention that there are other prudential rules overseen by OSFI that also play a role, including bank capital requirements and the OSFI supervision approach with the institutions it oversees. One specific rule I should highlight is that borrowers applying for either an insured mortgage, a rule made by the Minister of Finance, or an uninsured mortgage, a rule under the bailiwick of the superintendent of financial institutions, must qualify under the minimum qualifying rate. Currently, that is the greater of the borrower's contract rate plus 200 basis points, or a minimum floor rate of 5.25%.

The minimum qualifying rate increases borrower resiliency and reduces vulnerabilities associated with high household debt and risk to financial stability by better positioning borrowers to be able to make their mortgage payments as interest or other expenses rise or if there is a loss of income due to personal circumstances.

Going one step further with respect to the committee's study, with respect to variable rate mortgages, since the increase in interest rates from March 2022, lender and borrower risks associated with variable rate mortgage products and renewals have increased.

While the majority of Canadians still opt for a five-year fixed rate mortgage, the number of Canadians taking on a variable rate mortgage increased as interest rates were rising. This has now abated at current interest rates.

There are two types of variable rate mortgages: an adjustable-rate mortgage and a fixed-payment variable rate mortgage. I will give you just a bit of background here for your study.

With an adjustable-rate mortgage, the borrower's payment automatically increases or decreases as interest rates rise or fall. With a fixed-payment variable rate mortgage, the borrower's payment remains constant, but the portion going to interest versus principal varies as interest rates change. With fixed-payment variable rate mortgages, if the interest rate rises during the borrower's term, the amortization period can be extended to keep the monthly payment fixed. Financial institutions have policies that guide this.

Another and a final point of emphasis in my opening remarks is that our current understanding is that many homeowners are in a financial position to manage rising interest rates and are increasing monthly payments. However, for some borrowers, lenders may need to explore flexibility depending on borrowers' circumstances and the degree of hardship. Our understanding is that lenders have been proactively reaching out to customers on this matter to present options to help manage the situation on a case-by-case basis.

Thank you very much. My colleagues and I would be pleased to answer any questions you may have or point you to the appropriate stakeholder who could answer your questions.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Sample, for those opening remarks.

We are going to get into our first round of questions.

I am going to ask, in our first round, if those witnesses who are most appropriate to answer the members' questions could repeat their name and the department they represent.

Starting on our first round, each party will have up to six minutes for questions. We are starting with the Conservatives.

I have MP Chambers.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Welcome.

Thank you, Mr. Sample. If it's all right with you, I'll direct my questions, and you can parcel them out as you wish.

All lenders don't have the fixed-payment variable term mortgage, as you discussed. For those who do, my understanding is that, even though a borrower could be in a negative amortization experience now, i.e., you're adding to the principal you owe every month, upon renewal, the way the mortgage market works, you need to go back to the original amortization period when you signed your mortgage. For example, if you signed a 25-year mortgage, when you renew at year 20, you actually have to amortize what you owe on the 20, not on 25 and not on 30—if you don't want to shop and requalify and go to another institution.

Do I have that about right?

[Robert Sample]

I do think, generally speaking, there are different internal policies across different institutions. Generally speaking, that is what we've heard, but I would like to caveat that with the fact that the institutions will be working with borrowers. If there were a hardship case in getting back to the original amortization, the expectation would be that they might be able to work out a refinance or some other mortgage flexibility option if there is a circumstance where the borrower just couldn't make the higher payments at that time.

[Adam Chambers, Conservative, Simcoe North, ON]

That's fair. My understanding is, though, if you do not accept the original amortization term you need to requalify. I think this is where we're going to get into a problem. If a house price falls and you need to requalify and it requires an appraisal, or, for whatever reason, your financial situation changes, my understanding is that the rule for OSFI—and I understand this would be a good question to ask OSFI—is that you need to requalify on the B-20 guideline. I'm interested in learning more about that, but I appreciate it.

The percentage of mortgages that are actually over 35 years in amortization have actually jumped substantially from 0% just a year ago. At some institutions, 25% to 30% of their mortgage book is now over 35 years. Do we know, or does the Department of Finance know, how many of those mortgages are insured?

Of the 25%, say, that are over a 35-year amortization at an institution, how many of those are insured?

[Robert Sample]

I'm not sure we have that statistic with us today.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay. It would be an interesting stat, I would think that those who are looking at this space would want to know.

[Robert Sample]

Yes. Just to kind of lean into this, generally speaking, the larger share of mortgage originations, new mortgage originations in Canada, is uninsured, so for a down payment, uninsured, you have to have a down payment of more than 20%.

[Adam Chambers, Conservative, Simcoe North, ON]

Of those who have had amortizations extended, do we know how many of them are principal residences or investment properties?

[Robert Sample]

These are detailed questions that we'd have to get back to you on. What I can say is that, for insured mortgages, investment properties are prohibited.

[Adam Chambers, Conservative, Simcoe North, ON]

I'm very interested in the answer to the second question. If we—that's “we” as in the government, the country, a society—are allowing investors to stretch out amortization periods because they cannot meet the obligations under financial hardship, I'm not really sure that's a public policy decision that everyone would agree with.

If you do have some information on that, I would certainly appreciate it. I think some of my other colleagues at this table as well would appreciate having information about the level of investment activity in the residential real estate market, which, from my understanding, is quite high historically. That's a big data point that would be very helpful for us as we think about recommendations to the government on policies about who we might help, who we might not help, who deserves help and who doesn't deserve help. These are going to be tricky conversations, so the data we get from some of that will be very helpful.

Why don't we have a 10-year mortgage product in Canada? Why is there not a functioning 10-year market? If everybody believes the government's line and the Bank of Canada's line that interest rates are going to come down and inflation's going to come down.... The most popular product in the U.S. is a 30-year, fixed rate, fixed-payment term mortgage. There's no renegotiation.

I'm having a really hard time understanding this. Has the department looked at why we don't have a 10-year product? You could “blend and extend” some of these folks. That's how you could get over a little bit of a hump. Technically, the 10-year rate should be below what the five-year rate is right now. The yield curve's inverted.

Is there a reason that Canada doesn't have a well-functioning longer-term product?

[Robert Sample]

Thank you for the question. That is something that's been asked over time and been looked into. I think there are some legal parameters around that, which might influence it.

First off, though, I should say that there are 10-year products offered by some institutions. It's not that it's prohibited or doesn't exist. I believe provincial interest act requirements also play in. I don't have the specifics on me in terms of how that manifests itself, but there are some legal conditions that might guide why there are fewer 10-year mortgages than—

[Adam Chambers, Conservative, Simcoe North, ON]

I'm just going to jump in here, because I'm out of time.

If you have a study that you've produced in the last little while, or if you've looked at one, it would be very helpful if you could provide any of that research to the committee.

[Rachel Grasham, Senior Director, Housing Finance, Financial Stability and Capital Markets Division, Financial Sector Policy Branch, Department of Finance]

Perhaps I could add to that—

[The Chair, Liberal, Peter Fonseca]

We're out of time for MP Chambers. If you, as officials, have a study that you can submit to the committee, please do so.

Thank you, MP Chambers.

We're moving to the Liberals and MP Baker, please.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Thank you to all for being here today.

One thing I hear about from my constituents in Etobicoke Centre is how rising interest rates are impacting their mortgage servicing costs. I think the biggest fear.... There's going to be an increase in interest costs, and people are going to have to pay if they have a variable rate mortgage, but then there's the concern about the worst-case outcome, which is delinquencies—people not being able to pay their mortgages, people having to sell their homes and things like that.

Have we seen an increase in delinquencies since interest rates started climbing?

[Robert Sample]

In answer to that specific question, I believe arrears remain close to prepandemic levels.

Matt or Julie, would you like to answer?

[Matthew Emde, Senior Director, Demand and Labour Analysis, Economic Analysis and Forecasting Division, Economic Policy Branch, Department of Finance]

Mortgage arrears in particular remain very low. They're pretty much near all-time lows. There are different metrics of it, but the Bank of Canada publishes some data publicly. In the first quarter of this year, 0.12% of mortgages were in arrears, well below the prepandemic 2015 to 2019 average of 0.23%. There's no evidence so far of mortgage arrears rising.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Why is that?

[Matthew Emde]

There are a number of factors.

One is that household finances overall are fairly healthy. They benefited from strong income and strong labour markets over the past few years, a build up of savings and strong asset price growth. By a lot of metrics, household balance sheets are in better shape than they were prepandemic, so that's helping households handle the impact of elevated inflation and elevated interest rates.

The other thing I'd say though is that there is evidence that arrears rates have been rising in other credit products. Credit cards, auto loans and installment loans have all been creeping up lately. They're still at relatively low levels—kind of at 2019 levels. This is what we typically see.

When households are under financial pressure, they prioritize their mortgage payment above all else. The last thing you'll see an increase in is mortgage arrears. Everything else happens first. They increase credit card borrowing. They may go delinquent on a credit card. It's not surprising to us that we've seen no action at all in mortgage arrears so far.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

People making late payments I assume is what you mean by arrears.

What I'm hearing you say is that mortgage delinquencies, mortgage arrears, are lower than they were prepandemic, but that for other forms of loans—and you cited credit card debt or auto loans as examples—the figure is similar to 2019 levels. Is that what I heard you say?

[Matthew Emde]

That's right.