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Growing number of mortgage loans have amortization periods of more than 30 years

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Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce said the proportion of mortgages with amortization terms of over 30 years recently doubled in three months.Evan Buehler/Canadian Press

The percentage of housing loans issued by major Canadian banks is increasing, but the amortization period exceeds 30 years.

All in all interest rate hike Variable rate mortgage servicing costs will rise, according to Canada’s central bank. But most banks don’t immediately increase borrowers’ monthly payments. Instead, the amortization period (the time it takes to pay off the loan in full) increases. As the term of the loan approaches renewal, the amortization must return to its original length. In the current rising interest rate environment, your monthly payments will suddenly increase.

at Royal Bank of Canada RY-TBank of Montreal BMO-T and Canadian Imperial Bank of Commerce CM-T, the percentage of mortgages with amortization terms greater than 30 years has doubled in the last three months, according to company filings. This is he one of the clearest indicators that variable rate mortgage holders are under stress.

At RBC, the nation’s largest mortgage lender with approximately 310,000 variable rate mortgages, approximately 125,000 mortgage customers trigger point This requires an immediate increase in monthly payments, according to Lia Robinson, vice president of home equity financing policy and regulatory management.

As of July 31, mortgages with terms over 30 years made up a quarter of banks’ mortgage portfolios. CIBC.

The high proportion of mortgages with long repayment terms indicates a number of borrowers whose monthly payments could increase significantly.

“The vulnerability is widespread,” said Robert Colangelo, senior credit officer at credit rating agency Moody’s Investors Service. It means they are vulnerable to much higher mortgage payments.”

Carol Signdon, a spokeswoman for the Canadian banking regulator, said: financial institution supervisory authority “OSFI expects lenders’ risk management to respond to changing circumstances and practices will be adjusted accordingly,” the (OSFI) said in an email.

In late August, CIBC executive Shawn Beber said his bank had $7 billion in variable-rate mortgages that would renew in the next 12 months, but said the bank deemed the risk of delinquency high. said it has less than $20 million in balances with its existing customers. Bank spokesman Tom Wallis said CIBC will reach out to clients facing payment shocks and offer options including “increase payments or switch to a fixed term at any time without penalty”. Stated.

BMO spokesman Jeff Roman said the bank is in regular contact with its variable-rate mortgage customers to find a solution when it approaches the trigger rate for higher monthly payments. said they are cooperating.

Variable rate mortgages are based on the bank’s main lending rate, which is usually linked to the Bank of Canada’s benchmark interest rate. Those rates rose quickly as the central bank raised its benchmark interest rate to 3.75% from his early March 0.25%.

For variable rate mortgages with fixed monthly payments, the prime lending rate determines how much of each payment is used to pay principal or interest. When prime goes up, more of a borrower’s monthly payment goes toward interest.

Your monthly payment will usually remain the same until the term of your current mortgage expires, so as interest rates rise, it will take longer to pay off your loan. OSFI says it expects financial institutions to set thresholds when underwriting loans, but there is no uniform maximum amortization period.

Upon renewal, the term of a variable mortgage typically must be returned to its original amortization amount. For many borrowers, this means monthly payments are suddenly higher unless they have a lump sum upfront on the principal or have spare cash to switch to a fixed rate mortgage.

Also, the borrower can only change the key terms of the loan by extending the repayment period or refinancing. This is similar to taking out a new loan. At least 2 percent higher than the actual mortgage rate.

Considering today’s average 5-year fixed mortgage interest rate is 5.5%, this means that borrowers must prove they can pay off their mortgage if the interest rate is 7.5%.

When interest rates rise so quickly that your monthly mortgage payments can no longer cover the outstanding interest, your payments usually increase immediately. This is to prevent the mortgage from growing even though the borrower makes payments.

In contrast, some banks, including Bank of Nova Scotia, structure variable mortgages so that monthly payments are adjusted regularly as interest rates rise or fall.

Mortgage experts estimate that monthly payments on variable rate mortgages have surged significantly since Canada’s central bank launched a campaign to calm down. inflation.

Samantha Brooks, chief executive of mortgage brokerage firm Mortgages of Canada, said it would be difficult for many households to have extra cash to pay off loans.

For example, if a homeowner took out a $800,000 mortgage with a 25-year amortization rate of 1.35% in January, they would be paying $3,143.42 per month, with most of the mortgage payment going toward repaying the loan. will be, he said. Brooks. At her 5.1% floating rate today, that same homeowner would be paying $4,723.45 a month, with most of the payment going to interest.

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