2023-10-13 04:00:00
Nearly a quarter of mortgage balances at major banks in the country are increasing rather than decreasing, and upcoming mortgage renewals risk making things worse.
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With interest rates rising rapidly, regarding 20% of mortgages banks hold are now “negatively amortizing,” meaning the monthly payment does not cover the principal and interest.
Unpaid interest adds up to the mortgage balance, which then increases instead of decreasing over time.
At BMO, 22% of residential loans are in this situation, for a total of $32.2 billion. CIBC has 19% of loans in negative amortization ($49.8 billion) and TD, 18% ($45.7 billion), according to figures from the big Canadian banks in the third quarter.
RBC and Scotiabank do not offer these types of products and therefore do not have these types of loans on their books.
“It’s because of these unique products that variable but fixed payment mortgages are. In recent history, it has never happened that so many loans are like this. Rates rose so quickly. We see something new, and it continues to grow,” explains Hanif Bayat, CEO of WOWA.ca, an online financial encyclopedia that closely follows the Canadian real estate market.
Another increase would hurt
Hanif Bayat points out that the possibility of seeing the Bank of Canada once once more raise its key rate by January is 80% at the moment, depending on the markets.
But that doesn’t mean that the number of loans in negative territory would necessarily increase, he adds. Everything will depend on what the banks do in the coming months. “There are a lot of people out there who are able to pay a little more per month to cover the interest on their loan. But they will only do it when they are forced to do it,” he said.
Lots of loans renew
A bigger problem is on the horizon. Until August 2024, WOWA.ca calculates, 1% of the seven million mortgage loans in Canada (i.e. 70,000) will be renewed each month. Between August 2024 and July 2025, this number will increase to 105,000 per month.
“It’s worse than negative amortization loans, in my opinion. Negative depreciation, you can correct it by adding 150 or 200 dollars more per month. But when we talk regarding renewal, going from a rate of 1.5% that we signed during the pandemic, to more than 6% for example, it will be $500 or $800 more per month that these owners will have to pay,” says Hanif Bayat.
“Every month that passes, even if interest rates remain unchanged, the number of people who will feel the pain increases significantly,” he warns.
RBC, for example, will have to renew 41% of its mortgage loans within two years, he points out. In each major bank, more than a quarter of loans will have to be renewed within two years.
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