The Office of the Superintendent of Financial Institutions (OSFI) is warning that mortgage holders are increasingly relying on extending amortization periods to help them afford their homes. This is a risky practice, as it can make it more difficult for borrowers to pay off their mortgages if interest rates rise or their incomes fall.
OSFI data shows that the average amortization period for new mortgages has been steadily increasing in recent years. In 2019, the average amortization period was 25.2 years. By 2022, it had reached 26.1 years. This trend is particularly pronounced among borrowers with high debt-to-income ratios.
There are a number of reasons why borrowers may be choosing to extend their amortization periods. One reason is that interest rates have been historically low in recent years. This has made it more affordable to borrow money, and has led some borrowers to take out larger mortgages than they would have in a higher-interest rate environment.
Another reason is that housing prices have been rising rapidly in many parts of Canada. This has made it more difficult for some borrowers to afford a home with a shorter amortization period.
OSFI is concerned that the trend of extending amortization periods is creating a "risky" mortgage market. The regulator is warning borrowers to carefully consider their financial situation before making the decision to extend their amortization period.
OSFI is also calling on lenders to be more cautious in approving mortgages with long amortization periods. The regulator is concerned that some lenders may be approving mortgages that are beyond the borrowers' ability to repay.