Home News Major mortgage lenders let borrowers shift unpaid interest onto principal to cope with rising costs

Major mortgage lenders let borrowers shift unpaid interest onto principal to cope with rising costs

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At least two of Canada’s largest mortgage lenders allow borrowers to pass some of their interest costs on to the principal of their mortgage. Housing loanto help cope with the impact of rising interest rates.

of variable rate mortgage Products of the Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T It’s not new, but it’s been tested in this climb environment.

With interest rates rising by 3.5 percentage points so far this year, borrowers are at risk of delinquent interest payments and an increase in the original loan amount.

See how rising interest rates will affect your mortgage costs

Both TD and CIBC have variable rate mortgages similar to most other major lenders. The monthly payments on the loan are fixed and the mortgage interest rate is tied to the Bank of Canada’s overnight lending rate.

However, with TD and CIBC, the original loan amount (mortgage principal) can be larger in some circumstances.Not sure if it’s Bank of Montreal BMO-T make this possible.Two other major lenders, Royal Bank of Canada RY-T and Bank of Nova Scotia BNS-Tdo not allow the principal to increase.

All in all interest rate hikeAs the cost of borrowing increases, more of a borrower’s monthly mortgage payment is used to cover interest costs.

When interest rates rise as sharply as this year, some borrowers will find themselves in a situation where their monthly mortgage payments are barely used to repay the principal. The borrower trigger rate, which often requires higher monthly payments in order to constantly reduce the size of the loan. This is also called amortization.

However, in TD and CIBC variable rate mortgages, borrowers may be allowed to stick above the trigger rate, up to a certain threshold, in payments that may not even cover the full amount of outstanding interest. . The unpaid portion of interest is deferred and added to the mortgage principal, increasing the borrower’s loan balance or negatively amortizing it.

Both banks say that in such scenarios, they will actively engage with customers to outline their options and help them choose the one that best suits their needs. They also said they couldn’t comment on how often this is happening because of upcoming earnings releases.

According to CIBC’s latest results for the quarter ended July 31, borrowers had not yet accrued accrued interest on the principal. However, “to what extent” [interest] Interest rates continue to rise and some of that could happen,” CIBC’s then-chief risk officer Sean Beaver said in a summer call to discuss the outcome. (Mr. Beber is currently in charge of CIBC’s U.S. operations.)

The Bank of Canada’s key rate is now 3.75%, compared with 0.25% in early March.With Central Banks Ready raise interest rates againmore borrowers are about to face a surge in payments, and some may even see loan sizes grow.

One indicator of borrower stress is the length of the amortization period, or the time it takes to pay off a loan in full. Over the past few months, the percentage of mortgage loans made by major Canadian banks, including CIBC, has increased, with amortization terms exceeding his 30 years.

At CIBC, Royal Bank of Canada and Bank of Montreal, the proportion of mortgages with amortization terms greater than 30 years has doubled in the last three months, company filings show. Banks report that as of July 31, about a quarter of their mortgages had a tenor of more than 30 years.

But in TD, the public has no way of knowing the current amortization period. This is because TD has not disclosed the amortization period beyond the original contract of the mortgage.

“Rates could theoretically rise indefinitely, and TDs would simply show the original contractual amortization as if rates hadn’t changed,” said Mike Rizvanovic, a research analyst at investment bank KBW. Stated.

TD did not comment on inquiries from The Globe and Mail.

Under federal banking regulations, a portion of a borrower’s loan must always be written off. But Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), also said it “expects lenders’ risk management to adapt to changing circumstances and to adjust their practices accordingly.” .

The Canadian Mortgage and Housing Corporation, a federal mortgage insurance company, allows mortgages to be extended up to 105% of the original loan amount for variable rate borrowers.

However, borrowers who are allowed to increase their loan amount run a higher risk of finding themselves in a situation where they owe more than their home is worth.

For example, consider a homeowner who paid a 5% down payment on a $500,000 property. As deferred interest is added to the mortgage, the loan can grow up to $498,750. This is 105% of his $475,000 in the original mortgage. (This is assuming the borrower has not factored her CMHC premium into the mortgage, which adds another 4% to the loan amount.)

At the same time, if the property were to face the typical 10% price drop seen nationwide so far this year, the property would now be worth $450,000.

CMHC said its policy does not fall under federal banking regulations. Negative amortization is allowed if mortgage payments are “recalculated at least once every five years to ensure the loan can be paid within its original amortization schedule,” it said.

Ben Rabidou, founder of market research firm North Cove Advisors, said the fact that CMHC rules allow insured mortgage balances to grow beyond the original amount raises questions. said.

“Is that sensible?” Rabidou said CMHC is “a risk manager on behalf of the Canadian taxpayer” in the housing market.

Rabidou also sees another problem with policies that allow mortgage balances to rise.

Upon renewal, the lender must return the mortgage to its original amortization schedule. For example, consider a borrower whose 5-year mortgage was amortized over 25 years to purchase a home. After 5 years, the lender recalculates payments so that the remaining mortgage balance is paid off in his remaining 20 years.

The result is higher payments for borrowers whose amortizations have increased in the first five years because mortgage installments have remained the same despite rising mortgage interest rates. Mortgage payments are also boosted if the interest rate at renewal is higher than the contracted interest rate the borrower originally contracted for.

Also, if loan increases were allowed during the term of the mortgage, these borrowers would have a higher mortgage principal to pay off in a shorter period.

“This is going to be a very nasty move,” Rabidou said.

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