Understanding the Canadian Mortgage Charter: A Step Towards Helping Vulnerable Borrowers

Deputy Prime Minister and Finance Minister Chrystia Freeland said the new Canadian Mortgage Charter is “one of the most important things” contained in the Fall Economic Statement.

In a recent move to address the financial strain on Canadian homeowners, the Liberal government introduced the Canadian Mortgage Charter as part of its Fall Economic Statement (FES). This initiative, as outlined by Deputy Prime Minister and Finance Minister Chrystia Freeland, aims to provide crucial support to those grappling with rising interest rates and mortgage payments.

Understanding the Canadian Mortgage Charter

The Charter is not a legislative instrument but serves as a set of guidelines for financial institutions. A Department of Finance official described it as a compilation of “rules and expectations” that banks are encouraged to follow. These guidelines primarily derive from the Financial Consumer Agency of Canada’s (FCAC) Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances, published in July.

Key Provisions of the Charter

  1. Extended Amortization Periods: Banks are expected to permit temporary extensions on mortgage amortization for holders under strain.
  2. Fee Waivers: Costs typically charged for mortgage relief measures will be waived.
  3. Stress Test Exemption: Insured mortgage holders won’t need to re-qualify under the stress test when switching lenders during mortgage renewal.
  4. Proactive Communication: Banks should inform homeowners about affordability options 4-6 months prior to mortgage renewal.
  5. Flexible Payment Options: Borrowers can make lump sum payments or sell their principal residence without facing prepayment penalties.
  6. Interest Waivers: In cases where relief measures lead to inadequate mortgage payments, interest on interest will be waived.
New home construction in a development in Oakville, Ont. (Nathan Denette/Canadian Press)

Addressing the Challenges

In her statement, Freeland acknowledged the rapid rise in interest rates and its impact on Canadians, emphasizing the government’s commitment to assist those worried about their mortgage commitments. She noted, “We understand this is a challenging situation and we are here to help.”

Clarifying the Scope and New Additions

While many of the charter’s measures pre-exist, their consolidation into a single document aims to make them more accessible to consumers. Notably, the charter introduces a requirement for banks to proactively reach out to borrowers before mortgage renewals and eases the process of changing lenders for insured borrowers by waiving the stress test requirement.

Who are ‘Vulnerable Borrowers’?

The term ‘vulnerable borrower’ remains undefined in the charter. However, the FCAC guidelines define a ‘consumer at risk’ as a homeowner experiencing severe financial stress, at risk of mortgage default due to exceptional circumstances.

Enforcement and Oversight

The charter’s implementation and compliance will be closely monitored by the federal government. Borrowers can file complaints on the FCAC website if they are not offered the outlined affordability measures. The FCAC investigates complaints involving federally regulated financial institutions and reports findings to Parliament, although specific enforcement measures remain unspecified.

The Current Mortgage Landscape

As per the Canadian Bankers Association (CBA) data, as of September 30, 2023, there were over 5 million mortgages in Canada, with 0.16 percent in arrears. This slight increase from August 2022 is a key indicator of the growing financial stress among homeowners.