Canada’s top banking regulator will soon implement new guidelines for the mortgage market, aimed at reducing the risks posed by negative amortization mortgages – home loans whose payment terms have ballooned for years and sometimes decades because payments are no longer enough to cover pay the loan. the original terms.
This month, the Superintendency of Financial Institutions release new capital adequacy guidelines for banks and mortgage insurers. Among the expected changes will be some aimed at curbing an increase in negative amortized loans.
About one in five home loans at three major Canadian banks are negatively amortized, which occurs when years are added to the original loan’s repayment term because monthly payments are no longer enough to cover anything other than interest.
In a standard 25-year mortgage loan, under normal circumstances, a certain percentage of the mortgage payment goes to the bank in the form of interest, while another portion goes toward paying down the principal. That way, as the borrower makes his payments, he owes less and less money over time.
But because of the large and rapid rise in interest rates over the last year and a half, that balance has become imbalanced.
It happened to Michael Girard-Courty. He bought a duplex in Joliette, Que., last year with a 25-year variable-rate loan. The monthly payment was within his budget, $1,156. But since he signed on the dotted line, the Bank of Canada has raised interest rates several times, meaning more and more of his payment is being allocated to interest, not to paying off the loan at the rate he had planned. .
As things stand now, “only $23 goes toward paying down the principal on my mortgage and the rest is all interest,” he told Breaking: in an interview. “And my mortgage went from 25 years to 47.”
While you hope you can change that, whether through lower rates or higher payment amounts, the investment you bought in hopes of accelerating your retirement has quickly become a liability that’s on track to stick around for longer than that I had planned. work.
“It’s not a fun situation and I never expected to be in it,” he said. “I don’t know how it’s going to end.”
You are not the only one in this situation. Exact figures are difficult to come by, but regulatory filings for Canada’s largest banks show that negative amortized loans make up a large and growing amount of debt. About a fifth of mortgages registered with BMO, TD and CIBC were in negative amortization territory last quarter.
That’s almost $130 billion of real estate debt where, instead of a standard 25-year loan, the mortgage is spread over 35, 40 or more years. And with approximately 100,000 mortgages coming up for renewal in Canada each month, more are likely on the way.
Patrick Betu, an Ottawa mortgage broker, says it’s an “alarming situation” that needs to be addressed.
Betu says none of his clients have negative amortization loans, largely because he has been recommending short-term, fixed-rate loans to overcome the current volatility.
“We obviously don’t have a crystal ball, so we can’t really say whether or not mortgage rates will go down in the short term, but that’s basically the situation with my clients,” he said.
Some lenders limit the possibility of negative amortization by requiring borrowers to make balloon payments when their payment mix approaches the limit, or by switching them to a fixed-rate loan with higher but consistent payments.
Two other big Canadian banks, Royal Bank and Scotiabank, do exactly that, which is why they are in a different situation.
“We do not create mortgage products with a structure that results in negative amortization, as payments on variable-rate mortgages automatically increase to ensure that accrued interest is covered,” RBC said in its report. most recent report to shareholders.
(Despite this, almost a quarter of mortgages registered with RBC are amortized over 35 years. At TD it is 22 percent, at BMO it is 18 and at CIBC it is 19, while at Scotiabank, less 1 percent of banks’ Canadian mortgage loan portfolio has a duration of more than 35 years, Scotland recently revealed.)
Betu is one of those who thinks variable rate loans with fixed payments that lead to negative amortizations should not be allowed at all, and hopes the new rules will crack down on them.
At a recent news conference, the head of the Office of the Superintendent of Financial Institutions, Peter Routledge, poured cold water on the idea that some kind of “crackdown” was coming, but said the upcoming guidelines are aimed at reduce the risk of these loans. present to the financial system as a whole.
“The concentration of risks is not high enough to raise serious concerns… but if [asked] Five years ago, if you wanted a problem of this size, no,” he said. “I think banks, financial institutions and borrowers would be better off if the prevalence of this product was less.”
Routledge says there are approximately $250 billion of mortgages in Canada currently amortizing over 35 years or more, which is a good indicator of a loan that is already longer than originally planned or will soon be.
That’s less than 10 per cent of Canada’s total mortgage debt of just over $2.1 trillion: “not small, not huge.” [but] manageable,” Routledge said.
But he did acknowledge that it is a problem, and guidelines coming out this month “will begin to discuss how we might address it and how we might implement a little more regulatory oversight to make this product a little less prevalent.”