Lenders and mortgage insurance providers are using emergency loan-modification options that will allow some struggling homeowners to extend their amortization periods, or reduce or defer payments, as mortgage payments soar along with interest rates.
The measures, meant to stave off defaults and buy borrowers time to find solutions to their payment woes, are sometimes available to households experiencing significant financial hardship.
During years of low interest rates and cheap borrowing, that hardship typically stemmed from individual financial emergencies, such as job loss or divorce. But with interest rates up 3.5 percentage points so far this year and the Bank of Canada poised for more hikes, the industry is now looking to assist borrowers who can’t manage growing mortgage payments.
Private mortgage insurer Sagen MI Canada Inc., for example, recently updated its guidance to lenders to say they can offer to extend amortizations, without first seeking the insurer’s approval, in cases where borrowers face “payment shock resulting from rising interest rates.” The new amortization periods can be as long as 40 years.
The move is meant to “provide lenders with tools to proactively assist insured borrowers who are experiencing hardship in this rising rate environment,” Jim Spitali, Sagen’s senior vice president of sales and marketing, said in an e-mail.
Canada Mortgage and Housing Corp., the country’s public provider of mortgage default insurance, and Canada Guaranty Mortgage Insurance Co., Canada’s other major mortgage insurer, also offer emergency loan modification measures, sometimes known as loan workouts, for borrowers in dire straits.
The process for accessing a loan workout differs depending upon whether a mortgage has default insurance – a type of insurance that protects lenders if borrowers don’t make their payments, and that is required for loans with down payments of less than 20 per cent. For insured mortgages, lenders must follow guidelines and policies set by mortgage insurance providers.
For uninsured mortgages – those with down payments of 20 per cent or more – whether or not to resort to a loan workout is largely up to the lender, said David Larock, a Toronto-based mortgage agent with TMG The Mortgage Group.
Regardless of what type of mortgages they have, homeowners approaching their financial breaking points should contact their lenders before they’ve missed payments, Mr. Larock said.
“Any borrower that is making their payments on time to date is going to get maximum flexibility,” he said.
Those who turn to their lenders only after late or missed payments will likely find there are few options on offer, he warned.
Sagen’s guidance for lenders says they may extend amortizations by up to 15 years, to a maximum of 40 years, for insured borrowers facing a Gross Debt Service ratio, or GDS, above 39 per cent. The ratio reflects the share of a household’s monthly income needed to cover its mortgage and other housing costs.
Stretching the amortization – the time it takes to pay off a mortgage in full – reduces the amount of each mortgage payment. In its recent communication with lenders, Sagen provided the example of a homeowner who took out a $500,000 variable-rate mortgage with fixed payments in November, 2017, with a 2.4-per-cent interest rate, a term of five years and 25-year amortization.
At renewal in November of this year, if the borrower’s monthly payment were recalculated based on a 5.5-per-cent rate, their monthly payment would climb from $2,218 to $3,096, an increase of nearly $880.
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Extending the amortization to 35 years, up from the remaining 20 years on the original amortization schedule, would bring the new monthly payment down to $2,417, making for a more manageable increase of just less than $200 a month.
But Sagen noted that it doesn’t allow for such emergency amortization extensions beyond the point at which a reduced payment would bring a borrower’s GDS below 39 per cent.
Canada Guaranty said in an e-mailed statement that it allows amortizations to be extended to 40 years, to bring borrowers’ ratios back to 39 per cent. And CMHC said its lenders can also stretch amortizations to 40 years in some circumstances.
Similar math could help fixed-rate borrowers who are facing large payment increases at renewal, or borrowers who have variable-rate mortgages without fixed payments. In the latter scenario, payments increase as interest rates rise.
Borrowers who have variable-rate mortgages with fixed payments also sometimes face cost increases during the terms of their mortgages that could be blunted by longer amortizations.
In those types of loans, which make up the make up the majority of variable-rate mortgages in Canada, the amount borrowers owe each month usually remains the same, but more of the money is applied to interest charges when rates climb. The recent spike in borrowing costs has pushed some of these borrowers to the point where their payments are barely enough to make a dent in the principal, or no longer enough to cover the interest owed. This typically prompts lenders to demand bigger payments.
For uninsured mortgages, lenders typically don’t provide a publicly available set of possible loan modification arrangements, Mr. Larock said.
“It’s really between the lender and the borrower to work it out,” he added.
Editor’s note: An earlier version of this article misstated Jim Spitali's title. This version has been corrected.
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