What does the new Canadian Mortgage Charter mean for home owners?

How do interest rates relate to affordability?

In an effort to subdue runaway inflation, the Bank of Canada (BoC) has raised the benchmark interest rate several times over the last 24 months. This rate affects the interest rates of other financial products. The interest offered on guaranteed investment certificates (GICs) is far higher than usual, for example. This is because the benchmark rate is higher.

Unfortunately for home owners in Canada, the benchmark rate also affects mortgage interest rates. Home owners with variable-rate mortgages, whose interest rates fluctuate with the benchmark rate, have grappled with sharp increases to their mortgage payments over the past few years. But even those with fixed-rate mortgages must contend with higher interest rates when their mortgages come up for renewal.

“In the face of a rapid global increase in interest rates, many Canadians are feeling the squeeze, particularly when it comes to affording a home to rent or own,” Deputy Prime Minister and Minister of Finance Chrystia Freeland said in a press release. The Canadian Mortgage Charter is one measure intended to provide relief.

What is the Canadian Mortgage Charter?

The Canadian Mortgage Charter is a document that lays out expectations for banks and other lending institutions about how they will behave in their relationships with “vulnerable borrowers.” The guidelines stem from a document published by the Financial Consumer Agency of Canada (FCAC) in July 2023, but the charter is a concise and public-facing document. It outlines six things Canadian borrowers can expect of their banks:

1. Allowing temporary extensions of the amortization period for mortgage holders at risk
2. Waiving fees and costs that would have otherwise been charged for relief measures
3. Not requiring insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal
4. Contacting home owners four to six months in advance of their mortgage renewal to inform them of their renewal options
5. Giving home owners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties
6. Not charging interest on interest in the event that mortgage relief measures result in a temporary period of negative amortization

Of these guidelines, numbers three and four are actually new. The charter is the first time lending institutions have been asked not to require mortgage holders to requalify if switching lenders, and the first time they’ve been asked to reach out to borrowers in the months leading up to mortgage renewal.

What does this mean for Canadian mortgage holders?

The Canadian Mortgage Charter is intended to encourage banks to identify at-risk borrowers and offer them mortgage relief measures so that fewer people experience extreme financial hardship or lose their homes.

The Canadian Mortgage Charter is not a law. Rather, it’s a set of expectations, much like the changes to mortgages, bank account fees, junk fees and dispute resolution proposed by the government earlier this year. And just like with those measures, the only recourse for borrowers if a lender doesn’t heed the government’s request is to make a complaint on the FCAC website. It’s unclear what, if any, consequence there is for non-compliance.

In additional to the new charter, the Fall Economic Statement announced billions of dollars in financing to accelerate housing construction, plus plans to crack down on short-term rentals “so that homes can be used for Canadians to live in.”

The government’s attention to housing in general and the plight of mortgage holders in particular is encouraging, and any effort to mitigate everyday Canadians’ financial strain is welcomed. Just how effective the charter will be in offering any substantive financial relief, however, remains to be seen.

Read more about mortgages:

• Mortgage affordability calculator
• The best 5-year fixed mortgage rates in Canada
• The complete guide for first-time home buyers in Canada
• Can a first-time home buyer have a mortgage co-signer?

About Keph Senett

Keph Senett writes about personal finance through a community-building lens. She seeks to make clear and actionable knowledge available to everyone.