I can’t believe moron’s are amortizing 30+. Our mortgages are 5 year max (then refinance) compared to the US (typically, 15 years+ locked into a rate)…
I wanted to share some important insights regarding the current state of variable rate mortgages in Canada. As interest rates continue to rise, the repayment period for these mortgages has been lengthening, surpassing 30 years in many cases. While this may provide some relief for borrowers facing higher borrowing costs, it also raises concerns about increased debt loads and potential risks.
In Canada, variable rate mortgages typically require borrowers to make fixed payments. As interest rates increase, a larger portion of the payment goes towards paying the interest rather than reducing the principal. This results in an extension of the amortization period and can lead to negative amortization if rates reach a trigger point where interest exceeds the fixed payment.
Data shows that variable rate loans now account for one-third of the outstanding residential mortgages held by Canadian banks, significantly higher than before the pandemic.
Unlike in the United States, where buyers can lock into a 30-year mortgage, Canadian fixed-rate mortgages renew in five years or less, exposing homebuyers to market rate fluctuations more frequently.
Interestingly, analysts estimate that over 20% of the mortgage portfolio of major Canadian banks had a repayment period exceeding 30 years in the first quarter, a substantial increase from just 2% a year ago. Royal Bank of Canada and CIBC have over a quarter of their mortgages with amortization periods exceeding 30 years, while BMO and TD also have a significant portion.
Extending mortgage amortizations poses certain risks, particularly if interest rates remain high over the coming years.
Customers may struggle to handle the increased debt burden during renewals, leading to forced home sales, a weakened housing market, or higher loan delinquencies. However, banks state that most customers have passed rigorous stress tests to handle higher rates.
The Bank of Canada has not provided specific comments, but Senior Deputy Governor Carolyn Rogers highlighted that extending amortizations serves as a useful “release valve” for temporary payment increases. Canada’s banking regulator, OSFI, has urged banks to address the risks associated with amortization extensions and resolve negative amortization as early as possible.