Banks report longer amortization periods on mortgages as borrowers struggle with higher rates

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The share of mortgages with ultralong amortization periods has rapidly increased to about 30 per cent of home loans at some of Canada’s biggest banks, another sign borrowers are struggling with higher interest rates.

At Bank of Montreal, the proportion of residential mortgages with amortization periods longer than 30 years reached 31.3 per cent last month. At Canadian Imperial Bank of Commerce the share was 30 per cent and at Royal Bank of Canada it was 27 per cent, according to the three lenders’ latest quarterly results, released this week.

That is up from the end of July, when 30-year-plus mortgages accounted for one quarter of each of the three banks’ residential mortgage portfolios. And the July numbers were a significant increase from the end of April, when those loans made up 10.6 per cent of BMO’s portfolio and 12 per cent of mortgages at RBC and CIBC.

In October, 2021, before the country’s central bank started hiking interest rates, the three banks had no mortgages with amortization periods above 30 years, according to their disclosures.

The growing proportion of mortgages with long amortizations gives an indication of the number of borrowers who could face significant hikes to monthly payments when they renew their loans.

For variable-rate mortgage holders with fixed monthly payments, every hike to the Bank of Canada’s overnight lending rate increases the amount of interest owed. Borrowers’ payments remain steady because their amortization periods – the amounts of time required to pay off the loans – are automatically extended.

When these borrowers renew their mortgages, their amortization periods are required to shrink back to the lengths of time specified in the original contracts, and the borrowers will face much higher monthly payments. Borrowers can change their amortization periods by refinancing.

Every lender is closely monitoring the impact of higher interest rates on its variable-rate mortgage borrowers and considering options for them.

“When the renewal comes, we’re generally looking to either reset to the initial term or re-underwrite for a new 25-year term,” Michael Rhodes, Toronto-Dominion Bank’s group head of personal banking, said on a conference call to discuss the bank’s fourth-quarter results. “On a case-by-case basis we’ll look at longer terms,” he said.

TD disclosed that 28.9 per cent of its mortgages had terms over 30 years as of the end of October. The bank previously did not reveal the proportion of mortgages on its books with amortization periods that have stretched beyond the loans’ original contract periods. Only 1 per cent of its loans had terms greater than 30 years as of the end of July.

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TD spokesperson Elizabeth Goldenshtein said the bank changed its disclosures for the latest quarter to “align with industry practice.”

With interest rates up 3.5 percentage points this year, borrowers are paying significantly more interest every month.

The Bank of Canada has acknowledged that its interest rate hiking campaign has been painful for mortgage holders. It estimates that half of all variable-rate mortgage holders with fixed payments have reached their trigger points, meaning their monthly payments go entirely toward interest and no longer cover any of their loans’ original amounts – also known as the mortgage principal.

If interest rates continue to increase, the central bank estimates that 65 per cent could reach their trigger rates by mid-2023.

Lenders are contacting their borrowers as they reach their trigger rates to discuss their payment options, which could include making lump-sum payments or increasing their monthly payment amounts.

National Bank of Canada chief executive Laurent Ferreira said his bank’s variable-rate borrowers have been able to handle their higher monthly payments for the most part. He said the bank has seen a “very small uptick” in delinquencies, when borrowers are unable to make their monthly payments.

He said he believes borrowers will face substantial increases in mortgage payments in the latter half of 2023 and 2024, when a chunk of fixed-rate mortgage holders are due to renew. He estimated that an average mortgage payment of $1,500 a month today will jump to $2,500 by 2024.

“The payment shock that this will bring to consumers over the second half of ‘23 and ‘24 on mortgage payments is quite substantial. Everyone knows it,” he said. “The central bank also knows it.”