Canadian banks see dip in 30 year-plus mortgages, but risks remain

© Reuters. FILE PHOTO: The moon rises over the Toronto city skyline as seen from Milton, Ontario, Canada, January 23, 2016. REUTERS/Mark Blinch

By Nivedita Balu

TORONTO (Reuters) – After a sharp rise in mortgage repayment terms over the past few quarters, Canadian banks’ home loans past 30 years have edged lower in the latest quarter but analysts say risks remain elevated with borrowing costs expected to stay higher for longer.

The Bank of Canada’s 10 interest rates since last year have triggered a spike in monthly payments for variable rate loans and in cases of fixed payments, their monthly contribution largely covered only the interest portion of their loan.

That has led to a rare situation in Canada where banks are seeing mortgage amortizations getting extended beyond 30 years, sparking calls from regulators to take immediate action to mitigate risks.

The big six banks said they have called on struggling customers giving them the option to switch to fixed-rate products, increase term payments or make a lump-sum payment as they hit the trigger rate.

For the top five banks offering variable-interest and fixed-payment options, that has resulted in mortgages with amortization of over 30 years dropping to between 23% and 29.8% in the three months ended July, from 25%-31% in the previous quarter.

When customers breach the trigger rate, all of their repayments go towards repaying interest, preparing them for a payment shock when mortgages come up for renewal. An estimated C$331 billion ($245 billion) in home loans are expected to come up for renewal next year alone.

CIBC’s CFO Hratch Panossian told Reuters in an interview that about 8,000 clients had increased their monthly payments and just over 1,000 clients made lump-sum payments, to remove their mortgage from the negative amortization status, as a result of the outreach during the third quarter.

“What we’re seeing in terms of behaviors within our clients is strong,” he added.

Canada’s total residential mortgage debt stood at C$2 trillion at the start of the year. CIBC, with its domestic focus, is one of the most exposed to the mortgage market and at end July, about 56% of its variable mortgage book only received interest payment.

Bank of Nova Scotia, the only bank among Canada’s top five to offer variable payments for its floating rate customers, had only about 1% of its overall residential mortgages amortize over 30 years, while loans amortizing between 20 and 29 years fell to 65.5% from 67.4% in the February-April quarter.

For the other four banks, mortgages amortizing under 25 years account for a half to nearly three quarters.

Scotiabank’s Canada head Dan Rees said the bank was now being more “disciplined with regards to customer selection” for new mortgages.

Still, the risks remain elevated as consumers are struggling to make monthly payments due to the rising cost of living.

“The very fact that banks are proactive … speaks to the fact that this is sort of a front-page issue, a household concern, a political concern,” said Brian Madden, the chief investment officer at First Avenue Investment Counsel.

“The ones that adjust on renewal, they are just kicking the can down the road and the reset will be probably bigger when they renew.”

TD Bank’s Canada personal banking head Michael Rhodes told analysts this week that “a meaningful number of customers” are making the changes.

While not all banks allow negative amortization, consumers have to adjust their repayments in line with rising interest rates.

“The industry has a significant portion of mortgages maturing in 2024, 2025 … If rates hold, we’ll pull more disposable income out of the economy and slow it even faster,” RBC’s CEO Dave McKay said.

($1=1.3508 Canadian dollars)

(This story has been refiled to say ‘to offer’ instead of ‘not offer,’ in paragraph 10)