More Canadians Have Mortgage Amortization Periods Over 30 Years

A growing number of Canadian homeowners are choosing to pay off their mortgage loans over 30 years or more as persistently high interest rates and inflation continue to bite. 

A new report from the country’s banking industry regulator found that amortization periods, or the length of time it takes to pay off a mortgage in full, are increasing. As of the last quarter of last year, major lenders BMO, CIBC, and RBC had about 30% of mortgage loans in their portfolios that had amortization rates over 30 years. In October 2021, that number was 0%.

When homeowners take out mortgage loans, the amortization period is typically 25 years. This period can be extended for certain borrowers as lenders can make exemptions when a mortgage is up for renewal.

“When facing renewal lenders force customers to go back to their contractual amortization, but that can make the payment shoot up, which could result in homeowners potentially losing their home,” said Victor Tran, a real estate and mortgage expert at RATESDOTCA. “Banks will make exceptions if that’s the case.”

Higher interest rates have led more homeowners with variable-rate mortgages to extend their amortization periods, to keep up with their monthly mortgage payments. Although this can prevent homeowners from defaulting on their homes, it means that not only will it take longer for the home to be paid off but also that more money will be paid in interest. 

“When the mortgage passes the trigger rate and the amortization is extended, the consumer is paying mostly interest and barely paying down the principal. As a result, when the mortgage is up for renewal, there will have been hardly any change in the principal amount owed,” Tran said adding that in some instances, monthly payments may not even cover the interest, pushing balances higher.

This increase in amortization periods has set off some alarms. The Office of the Superintendent of Financial Institutions (OSFI) recently identified housing as the number one risk the regulator is keeping an eye on this year. In their risk assessment report, OSFI said that it is “actively assessing the risks posed by variable rate fixed payment mortgages” to determine if there’s a need for revisions.

“While increasing amortization is one way to cope with higher interest rate hikes in the short term, it’s not without risk. Extended amortizations will lead to a greater persistence of outstanding balances, and greater risk of loss to lenders,” an OSFI spokesperson said in a statement.

The Bank of Canada is also investigating the trend. The Bank’s Senior Deputy Governor Carolyn Rogers recently appeared at Parliament’s Standing Committee on Finance and was asked by MP Adam Chambers if she was concerned that a growing proportion of some lenders’ mortgage portfolios now have amortization periods over 40 years.

“I think the banks are acutely aware that mortgages that are not getting paid down, that are not getting amortized down, is not a sustainable situation over the long term,” Rogers said. “But as we understand it, they’re working closely with these borrowers.”

Information for this story was found via the Toronto Star, Canadian Mortgage Trends, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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