More mortgages in Canada now show amortization periods exceeding 30 years

There are more and more mortgages issued by major Canadian banks that have amortization periods of more than 30 years. It means that the stress borrowers are facing due to interest rates hikes increases.

Every interest-rate hike by the Bank of Canada raises the cost to service a variable-rate mortgage. However, in case of some banks, the borrower’s monthly payment doesn’t go up immediately. The amortization period (the period it takes to pay off the entire loan) just becomes longer. When it’s time to renew the loan, the amortization has to go back to its initial length, which amid currently growing rates leads to a sharp hike in monthly payments.

At RBC, BMO and CIBC, the share of mortgages with an amortization of more than 30 years doubled during the three months period. It points to the fact that stress is intensifying for variable-rate mortgage holders, who are forced to pay more interest and less principal.

In case of RBC, Canada’s largest mortgage lender with almost 310,000 variable-rate mortgages, about 125,000 mortgage clients have reached or are close to a trigger point that needs an immediate rise in monthly payments, says Leah Robinson.

It turns out that as of July 31, mortgages with terms of more than 30 years accounted for one quarter of the banks’ residential mortgage portfolios. Meanwhile, at the end of April, the number was 10.6% of BMO’s portfolio, and 12% of mortgages at RBC and CIBC.

A bigger share of mortgages with long amortizations gives us the number of borrowers who may face sharp increases to their monthly payments.

“The vulnerability is expanding,” – noted Robert Colangelo from credit rating agency Moody’s Investors Service. “If that share goes up, it will mean that more variable-rate mortgage holders are vulnerable to a much higher mortgage payment.”

According to CIBC spokesman, Tom Wallis, the bank contacts its clients facing payment issues and offers various options. Some of them include “raising their payment and/or switching to a fixed term at any time without penalty.”

BMO spokesman Jeff Roman says the bank is always in contact with their variable-rate mortgage borrowers, working with them to find the right solution when they are getting close to the trigger point.

When you renew your loan, the term of a variable mortgage usually has to go back to its initial amortization. For many borrowers, it will mean a significant monthly payment hike, unless they come up with enough money for a lump-sum prepayment toward the principal, or switch to a fixed-rate mortgage.

The deal is that borrowers can increase their amortization or change the loan’s basic terms only by refinancing it, and it’s similar to getting a new loan. You need to requalify and pass a stress test, proving your ability to make payments at your contract interest rate plus 2%.

With the current average five-year fixed mortgage rate of 5.5%, it means you will have to qualify under 7.5%, which is an extremely high rate for some homeowners.

When rates go up sharply and the monthly payments no longer cover the interest, it usually causes an immediate hike to the payment amount. It’s supposed to help you avoid a situation when your mortgage goes up even when you are still making payments.

Meanwhile, many banks including Bank of Nova Scotia and some smaller lenders prefer another variable mortgage structure: your monthly payments change systematically depending on interest rate hikes or cuts. Thus, borrowers face more gradual changes to their monthly mortgage payments.