Canadian banks are going to make it a little more difficult to get a break from your mortgage. Office of the Superintendent of Financial Institutions (OSFI) announced they will begin phasing out special treatment of payment deferrals. Previously, due to the pandemic, the regulator had allowed banks to avoid classifying payment deferrals as non-performing loans. Starting in October, no new deferrals will receive special treatment.
Regulators Gave Banks Freedom To Defer Payments
In March, OSFI began giving banks special capital treatment for deferred loans. This allowed deferral of payments without classifying the account as non-performing. Non-performing loans typically require banks to set aside extra capital, in case the loan goes bad. By avoiding the non-performing classification, banks were able to avoid setting aside extra cash. The program encouraged banks to easily grant deferrals for up to six months.
Payment Deferral Programs Start Phase Out In September
Starting tomorrow, OSFI is phasing out this program. Accounts granted a payment deferral from September 1 to September 30 will only receive special treatment for a max of 3 months. This is down from the previous six months from March to August. As of October 1, no new payment deferrals granted will be subject to special treatment. Basically, the program now has a final date.
What Does This Mean?
This likely means payment deferrals won’t be as easily granted from lenders. OSFI’s special treatment made it a no brainer to grant a deferral to borrowers. Since the lender didn’t have to classify it as non-performing, or put aside extra cash, they granted them with ease. Now banks will have to revert to their pre-pandemic support programs for borrowers experiencing hardship.
An end to payment deferrals means the deferral cliff is getting closer. While some people are expected to smoothly transition back to regular payments, the plan was always just to buy people a little extra time. Higher credit defaults are forecasted to rise well into next year.
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