Liberals' mortgage charter draws praise and warnings as renewal cliff looms

financialpost.com:

A new charter codifying the relief that lenders must offer financially strapped mortgage borrowers is drawing mixed reviews from market watchers, with some warning that elements of the policy will prolong overheated housing market conditions and add upward pressure on interest rates.

The charter was among a suite of housing affordability measures unveiled Nov. 21 by Finance Minister Chrystia Freeland as part of the federal government’s fall economic update, and comes as a looming mortgage cliff will see more than two million home loans up for renewal over the next two years.

Under the Canadian Mortgage Charter, lenders will have to contact homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options, which must include the ability to make lump sum payments to avoid negative amortization and the option to sell their principal residence without a prepayment penalties. Lenders will also be required to offer temporary extensions of amortization periods for mortgagors  at risk and to waive any fees and costs for doing so. In addition, banks won’t be able to charge “interest on interest” if a borrower is temporarily in a period of negative amortization, which means they are covering just the interest without paying down any principal.

The charter also provides relief for insured borrowers from a mortgage stress test if they switch banks to renew, a move intended to increase competition among lenders and ease the pain of renewals over the next couple of years amid higher interest rates.

While some observers praised the government for recognizing that Canadians are struggling with the sharpest interest rate increases in 40 years, others, such as economist David Rosenberg, who