"During the Covid years, the principal unintended consequence of what we went through was this buildup in mortgage underwritings," Peter Routledge, who heads the Office of the Superintendent of Financial Institutions, said Tuesday at a National Bank of Canada financial-services conference in Montreal.

"That created a risk concentration and that's worried us really since it formed," he said. But he added that this is a "pocket of risk. I don't consider this risk systemic, but it could lead to a period of uncertainty in the housing system." 

At the height of a housing market boom fueled by the low-interest rate environment, banks handed out 40% more home loans compared to pre-pandemic averages, he said. Plus, half of those were variable-interest rate mortgages, compared to the regular rate of less than a quarter, he said.

"Notwithstanding that risk, I've been pleasantly surprised at how Canadians and their lenders continue to manage it down," Routledge said. 

Canadian lenders now have about C$220 billion ($162 billion) of mortgages with amortization periods — the length of time permitted to pay off the loan — longer than 35 years. That's down 27% from just under C$300 billion at its height, he said. 

"That's a really good sign and I'm encouraged by that."

Routledge's remarks struck a more optimistic tone than comments he made last fall, when he issued stern warnings about the particular risks of variable-rate mortgages with fixed monthly payments, including calling them a "dangerous" product during a government hearing. 

Borrowers with these types of loans have seen the portion of their monthly payment that goes to interest increase dramatically until they are no longer paying down any portion of the loan's principal. 

This has led to amortization periods theoretically stretching decades beyond the standard 30 years. But the contract with the bank does not actually change, so when the homeowners go to renew their mortgage at the end of a typical five-year term, they're likely to face significantly higher monthly payments. 

Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal are the only three major lenders that permit such negatively amortizing mortgages. Over the six months through the end of January, the trio saw this type of mortgage decrease by 27% to a combined C$94 billion. That was down from C$128.3 billion at the end of July, according to their quarterly reports.   

Routledge did not specifically highlight the risk of negatively amortizing mortgages during an on-stage interview Tuesday, though in a copy of prepared remarks, he said the housing system would be better served if such products "were less prevalent."