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  • Andrew Cigna

How Canadian Banks Are Navigating Soaring Interest Rates Through Longer Amortizations


Despite soaring interest rates, Canada's delinquency rates have remained low, and one reason for this might be that many homeowners are choosing not to pay off their super-sized mortgages. Recent filings from Canada's Big Six banks show that a significant share of mortgages has remaining amortizations of 30 years or longer, up from virtually non-existent just last year.

BMO tops the list with nearly a third (32.4%) of their portfolio having 30 years or more remaining as of Q1 2023. CIBC, TD, and RBC follow closely behind, with 30.0%, 29.3%, and 27%, respectively, of their portfolios having mortgages with 30 years or more of repayment left.

It's important to note that these are not mortgages with 30-year terms, but rather mortgages with at least 30 years of repayment left, and often significantly more. It's also worth emphasizing that this is not a problem affecting all banks. For example, the share at Scotiabank (1.5%) and National Bank (1%) remain similar to any other year. This implies that it might be a problem specific to certain banks.

How Do Canadians Get Mortgages with Such Long Remaining Terms?

The answer is negative amortization, a specialty product to obtain a loan that long. Most of Canada’s variable rate mortgages have a fixed monthly payment, which means borrowers get each month's predictability but the amount applied to principal varies. If interest rates fall, more is applied to the mortgage principal and less towards interest. Borrowers receive a pleasant surprise when they come to renew their mortgage - they tend to find out they repaid more than they thought.

However, if interest rates rise sharply, that can mean the borrower isn't paying enough to cover interest, resulting in negative amortization, which extends the length of repayment. While this might be a sacrifice some are willing to make to manage their repayment schedule, it comes at a high interest cost, ultimately extending the repayment schedule.

Canadian Mortgage Borrowers Are Seeking Lower Payments and Longer Terms

The maximum amortization in Canada is typically 35 years, but banks seem to believe that's not enough. A significant share of the above banks’ portfolios had at least 35 years left, with over a quarter (27.4%) of TD’s Canadian residential portfolio having amortizations of at least 35 years remaining in Q1. CIBC (27%) and RBC (26%) follow closely behind. Unfortunately, BMO didn't break down amortizations for more than 30 years.

This situation is highly unusual as one only has to look at the same period a year before when only three banks had amortizations longer than 30 years - Scotiabank (1.4%), National Bank (1.3%), and TD (0.3%). In contrast, over a quarter of mortgages at some banks barely trigger any concerns. While delinquency rates remain low, the country is not necessarily in the clear. Housing has already diverted significant capital from the “productive” economy, and an economic slowdown at the expense of increased debt only worsens if the repayment of that debt is extended.

In conclusion, Canada's Big Six banks have a large share of mortgages with long remaining terms, with some banks' portfolios having at least 35 years left, up significantly from the same period a year before. Negative amortization seems to be the key to obtaining such long-term mortgages, which might put Canadians in a difficult place down the road. With housing already diverting significant capital from the “productive” economy, it remains to be seen whether this trend will continue and what implications it holds for Canada's economy in the future.

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