What is Canada’s secret for having such low delinquencies despite its high-interest rates? Evidently, they never paid off those enormous mortgages. A significant portion of mortgages had remaining amortizations of 30 years or more in Q1 2023, according to reports from Canada’s Big Six banks. Most of the Big Six reported that at least 30 years of payments would still be made on at least 25 percent of their portfolio. The share was almost nonexistent only a year ago
Suddenly, the Big Six Banks of Canada have a large number of mortgages with lengthy remaining terms
The majority of mortgages with 30 or more years left to pay off are held by more than half of the Big Six banks. With over a third (32.4%) of its portfolio still in existence as of Q1 2023, BMO topped the list. RBC (27%), TD (29.3%), and CIBC (30.0% of its portfolio) were close behind. It’s important to emphasise that these aren’t 30-year mortgages. They are mortgages with a minimum remaining repayment term of 30 years.
Before we go, it’s crucial to understand that not all banks are experiencing this issue. The market shares at National Bank (1%) and Scotiabank (1%) are unchanged from year to year. This indicates that the problem is isolated to those particular institutions and is, at the very least, not a general banking issue.
For Canadians, even interest-only mortgages could have been too much
How in the world can you ever qualify for a mortgage that long? To receive a loan that long, a specialist product is often needed. The explanation is negative amortisation, which is what lenders are attempting to prevent with borrowers who purchased an excessive amount of real estate.
The majority of variable-rate mortgages in Canada have a set monthly payment. Therefore, although the amount applied to the principal varies, borrowers still receive the predictability from month to month. If interest rates drop, more money is put towards the principal of the mortgage and less towards interest. It is a pleasant surprise and generally what occurred over the 30 years before 2021. Renewal borrowers often discover they paid back more than they anticipated.
It’s also true that higher rates have a negative impact on principal and a positive one on interest. A sudden rate increase may indicate that the borrower isn’t making enough payments to cover interest. This is negative amortisation, in which the payback period is lengthened. On a long enough time horizon, anyone can afford anything, but it comes at a high interest cost. Some people are prepared to make that compromise in order to manage their payback plan.
Canadian Homebuyers Want Lower Payments and Longer Terms
Usually, the maximum amortisation is 35 years, but it seems that banks do not believe that is sufficient. The portfolios of the aforementioned institutions still have at least 35 years remaining in them. In the first quarter, there are still at least 35 years of amortisation on almost a quarter (27.4%) of TD’s Canadian residential portfolio. RBC (26%), and CIBC (27%), are not far behind. For almost 30 years, BMO did not break out amortisations.
Long Mortgage Terms Almost Didn't Exist
To see how rare this circumstance is, one merely has to compare it to the same time period the previous year. In the first quarter of 2022, just three banks—Scotiabank (1.4%), National Bank (1.3%), and TD (0.3%)—had amortisations greater than 30 years. Seeing two points would have been concerning, but more than one-fourth of mortgages at certain institutions hardly draw attention.
Although delinquency rates may continue to be low, this does not guarantee that the nation is safe. A significant portion of wealth has already been diverted from the “productive” economy by the housing sector. If the debt is prolonged for repayment, an economic slowdown caused by more debt would only worsen.