June 5, 2023

A growing number of mortgages have an amortization period of more than 30 years

At Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce, the percentage of mortgages with maturities of more than 30 years recently doubled in a three-month period, according to company filings.Evan Buhler / The Canadian Press

A growing share of mortgages from Canada’s biggest banks have maturities of more than 30 years, a sign that borrower stress has been dwarfed by rising interest rates.

With every rate hike by the Bank of Canada, the cost of servicing a variable rate mortgage goes up. In most banks, however, the borrower’s monthly installment does not increase immediately. Instead, the repayment period – the time it takes to pay off the loan in full – increases. When the loan period comes up for renewal, the repayment must return to its original length, which in the current rise in interest rates forces the monthly payments to rise suddenly.

At Royal Bank of Canada RY-T, Bank of Montreal BMO-T and Canadian Imperial Bank of Commerce CM-T, the percentage of mortgages in amortization over 30 years recently doubled in three months, according to company filings. . This is one of the clearest indicators that stress is building for holders of variable rate mortgages, who are increasingly paying more in interest and less principal on their loans.

At RBC, the nation’s largest mortgage lender with about 310,000 variable-rate mortgages, about 125,000 mortgage customers have reached or are approaching a threshold that requires an immediate increase in monthly payments, according to Leah Robinson, vice president of home equity policy. and regulatory management.

Loan periods of more than 30 years made up a quarter of the banks’ mortgage portfolios on July 31. At the end of April, these loans accounted for 10.6 percent of BMO’s portfolio and 12 percent of RBC’s and RBC’s mortgages. CIBC.

A larger share of mortgages with long repayments indicates the number of borrowers whose monthly payments may increase significantly.

“Vulnerability is spreading,” said Robert Colangelo, senior credit officer at credit rating agency Moody’s Investors Service. “If that percentage increases, it means that higher variable rate mortgage holders will be exposed to a much higher mortgage payment.”

Carole Saindon, spokeswoman for Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), said in an email that “OSFI expects lenders’ risk management to respond to changing circumstances and practices to adapt accordingly.”

In late August, CIBC executive Shawn Beber said his bank has $7 billion in variable-rate mortgages to renew over the next 12 months, but less than $20 million in balances with customers the bank believes are at high risk of delinquency. . Bank spokesman Tom Wallis said CIBC is reaching out to defaulting customers and giving them options that include “increasing your payment and/or rolling over at any time without penalty.”

BMO spokesman Jeff Roman said the bank regularly contacts its variable-rate mortgage customers and works with them to find a solution as they approach the threshold rate for a higher monthly payment.

A variable rate mortgage is based on the bank’s prime loan rate, which typically moves with the Bank of Canada’s reference rate. Interest rates have risen rapidly when the central bank raised its key interest rate to 3.75 percent from 0.25 percent at the beginning of March.

In variable-rate mortgages with continuous monthly payments, the prime loan rate determines how much of each payment is used to pay the principal or interest costs. When the prime goes up, a larger part of the borrower’s monthly payment goes to interest.

Since the monthly installment usually does not change until the current mortgage term has expired, the loan repayment period increases as interest rates rise. There is no general maximum amortization period, although OSFI said it expects financial institutions to set thresholds when making loans.

When renewing, the loan period of the changing mortgage usually has to be returned to the original repayment. For many borrowers, this means their monthly payment will suddenly be higher, unless they have extra money to make a lump sum down payment towards the principal or switch to a fixed rate mortgage.

And borrowers can extend their repayments or change the basic terms of the loan only by refinancing, which is similar to taking out a new loan: it requires the borrower to requalify and undergo stress testing, which shows that they can make mortgage payments at an interest rate that is at least two percentage points higher than their actual mortgage rate.

With today’s average five-year fixed mortgage rate of 5.5 percent, a borrower would have to prove they could pay the mortgage if the rate were 7.5 percent, an unreasonably high bar for some homeowners.

When interest rates rise so fast that the monthly mortgage payment no longer covers the debt, it typically triggers an immediate increase in the payment amount. This prevents the mortgage from growing larger, even if the borrower makes payments.

In contrast, some banks, including Bank of Nova Scotia, structure variable mortgages so that monthly payments adjust regularly as interest rates rise or fall, meaning borrowers get more gradual but immediate changes to their monthly mortgage costs.

Mortgage experts estimate that monthly payments on variable-rate mortgages have risen significantly since the Bank of Canada began its campaign to curb inflation.

Samantha Brookes, CEO of mortgage brokerage Mortgages of Canada, said many households would find it difficult to come up with extra cash to service their loans.

For example, a homeowner who received an $800,000 home loan with a variable rate of 1.35% with a 25-year repayment in January would have paid $3,143.42 per month, and most of the home loan payment would have gone toward paying off the loan, according to the lady. Brookes. At today’s variable interest rate of 5.1 percent, that same homeowner would pay $4,723.45 a month, with most of that payment going toward interest.

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