Approximately 20% of mortgage loans from TD, BMO and CIBC banks are in negative amortization.
A 25-year variable rate $400,000 mortgage that cost $1,600 in January 2022; could rise to $2,800 in July.
Philippe de Montigny (View profile)Philippe de Montigny
Faced with the meteoric rise in interest rates in a year and a half, many borrowers no longer repay any capital on their mortgage loan, and do not even cover all their interest, which means that their debt is growing.
This is the case for approximately one in five mortgage loans within the Canadian Imperial Bank of Commerce (CIBC) and the banks of Montreal (BMO) and Toronto-Dominion (TD). More than $128 billion in residential loans offered by these three financial institutions are in negative amortization status.
If you have an adjustable rate mortgage with a fixed amount to repay each month and this monthly payment no longer covers the entire interest, you are now in a negative amortization situation. Typically, your bank will add unpaid interest to your mortgage balance, causing your debt to increase month to month.
Michael Girard-Courty fears that another increase in the key rate will push him into this situation. The resident of Joliette, northeast of Montreal, has a variable rate mortgage loan with CIBC for his duplex.
Since the start of the price increases rate, as its monthly payment is fixed, the proportion allocated to interest has increased. Last month, he repaid just $23 in principal, while he owed more than $1,133 in interest.
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His amortization period – the time it takes to pay off his mortgage in full – increased from 25 years to more than 47 years.
It's like an endless pit.
A quote from Michael Girard-Courty, holder of an adjustable rate mortgage
Possibly having to go into even more debt with the mortgage Negative depreciation, yes, that worries me. It creates financial stress, says the Quebecer.
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Since November 2022, Michael Girard-Courty has owned a duplex in Joliette, Quebec . In recent months, his mortgage payments almost only cover the interest.
Banks TD, BMO and CIBC reported negative amortizing loans totaling nearly $130 billion in the third quarter. This represents approximately 20% of all residential loans they have issued.
This is a very alarming situation. I hope that there will be a framework that could be put in place to ensure that similar situations are avoided, says Patrick Betu, broker at Alliance Hypothécaire, in Ottawa.
The three financial institutions offer their customers the opportunity to renew their mortgage or increase their monthly payments, which is difficult for some borrowers, indicates the mortgage broker.
There are some who will surely be pushed to sell their house. Others who will have to find other solutions to resolve this problem.
A quote from Patrick Betu, broker at Alliance Hypothécaire, in Ottawa
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Patrick Betu is a broker at Alliance Hypothécaire in Ottawa.
The Superintendent of Financial Institutions Canada, Peter Routledge, points out that many clients discover that they have fallen into negative amortization when they receive their bank statement.
But there is no contractual obligation to do anything until they decide to renew their mortgage, says the banking watchdog. The risk, at that point, is to end up with a much higher interest rate because their amortization period decreases but their balance remains essentially the same.
Overcoming this obstacle can be disruptive for both the borrower and the institution, says Routledge.
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TD Bank responded by email that it remains very comfortable with the credit quality within its portfolio. Those who have exceeded the critical rate can renew their mortgage loan to a fixed rate or increase the amount of their payments.
TD also adds that the proportion of its mortgages with amortization periods of more than 35 years fell last quarter, even though interest rates increased during the summer.
The Bank of Montreal, for its part, says it keeps its customers informed before a trigger threshold is reached. If a customer is approaching a trigger point, we work with them to determine the appropriate next steps to find the solution that suits their personal situation, explains a spokesperson, in an emailed statement.
BMO asserts that its practices comply with international financial reporting standards as well as those of financial market and banking regulators.
< p class="StyledBodyHtmlParagraph-sc-48221190-4 hnvfyV">The trigger point or critical rate occurs when your monthly payment no longer covers the interest. In other words, this is the point where your mortgage amortization becomes negative and the balance owed becomes greater than the original amount borrowed.
Michael Girard-Courty, for his part, is surprised that his financial institution – CIBC – has not yet offered him solutions. The bank has not contacted me, so I would say that they are not proactive on this, says the Joliette resident.
However, CIBC says it communicates proactively with its clients who are approaching a trigger threshold. The bank says that almost 8,000 of them have chosen to increase their monthly payments and that almost 1,000 customers have made lump sum payments to get out of this negative amortization situation.
Adjustable rate mortgages represent a third of our mortgage portfolio, and their credit quality and yield remain strong.
A quote from Frank Guse, Chief Risk Officer, CIBC
Overall, late-stage defaults remain low, especially compared to pre-pandemic rates, said Frank Guse, chief financial officer of the risk at CIBC, during a conference call with analysts.
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Approximately 19% of mortgage loans at CIBC are in negative amortization. A total debt of almost $50 billion.
Royal Bank (RBC), for its part, does not allow negative amortizations, but almost a quarter (24%) of its mortgages in the third quarter had an amortization period of more than 30 years.
Each client's situation is unique. In some cases, it may make sense for a client to increase their regular payments, while in others, an extended amortization may be more appropriate, RBC said in an emailed statement.
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The Royal Bank expects this proportion to continue to decline as more customers renew their mortgages, but admits that the evolution interest rates remain beyond its control. Further increases from the Bank of Canada would continue to impact variable rate mortgages, RBC says.
Adjustable-rate, fixed-payment mortgages – totaling more than $250 billion – have had their amortization periods extended beyond 35 years, according to Canada's banking industry watchdog.
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According to Peter Routledge, variable rate and fixed payment mortgages totaling more than $250 billion have seen their amortization periods extended over over 35 years old.
Financial institutions and borrowers would be wise to avoid this type of loan, recommends Superintendent Peter Routledge. He argues, however, that this is a small fraction of the nation's total residential mortgages, a debt that totals more than $2.1 trillion.
It's not nothing, but it's not huge either. It's manageable.
A quote from Peter Routledge, Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions wishes to better regulate these mortgage loans. It has held consultations and plans to publish new guidelines on this subject later this month.
We are assessing how we can tackle the problem and increase regulatory oversight to make this product less common, says Routledge.
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The Superintendent of Financial Institutions, Peter Routledge, during a speech at the Global Risk Institute summit in Toronto on September 26.
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