What’s the secret to Canada’s remarkably low delinquencies, despite soaring interest rates? Never paying off those super-sized mortgages, apparently. Filings from Canada’s Big Six banks show a big share of mortgages had remaining amortizations of 30 years or longer in Q1 2023. Most of the Big Six reported at least a quarter of their portfolio had at least 30 years of payments remaining. Just last year, the share was virtually non-existent.
Canada’s Big Six Banks Suddenly Have A Lot of Mortgages With Long Remaining Terms
More than half of Big Six banks have a large share of mortgages with 30 or more years to go. Topping the list was BMO, with nearly a third (32.4%) of their portfolio having 30 years or more remaining as of Q1 2023. Not far behind was CIBC (30.0% of its portfolio), TD (29.3%), and RBC (27%).
It’s worth emphasizing that these aren’t mortgages with 30 year terms. They’re mortgages with at least 30 years of repayment left. Many with significantly more, but we’ll come back to that.
Before we do, it’s important to understand this isn’t a problem seen at all banks. The share at Scotiabank (1.5%), and National Bank (1%) remain similar to any other year. At the very least, this tells us it’s not a widespread banking issue but one at those specific banks.
Even Interest Only Mortgages Might Have Been Too Much For Canadians
How the heck do you even get a mortgage that long? It typically requires a speciality product to obtain a loan that long. The answer is negative amortization, and how the lenders are trying to avoid it with borrowers that bought too much house.
Most of Canada’s variable rate mortgages have a fixed monthly payment. This means borrowers get the predictability month-to-month but the amount applied to principal varies. If interest falls, more is applied to the mortgage principal and less towards interest. It’s generally what’s happened over the 30 years prior to 2021, and is a pleasant surprise. Borrowers renewing tend to find out they repaid more than they thought. Success.
The opposite is also true—rising rates mean less towards principal, and more to interest. If rates rise sharply, that can mean the borrower isn’t paying enough to cover interest. This is negative amortization, where the length of repayment is extended. Anyone can afford anything on a long enough timeline, but it comes at a big interest cost. That’s a sacrifice some are willing to make to manage their repayment schedule.
Canadian Mortgage Borrowers Are Seeking Lower Payments, Longer Terms
The maximum amortization is typically 35 years, but apparently banks don’t think that’s not enough. A significant share of the above banks’ portfolios had at least 35 years left. Over a quarter (27.4%) of TD’s Canadian residential portfolio have amortizations of at least 35 years left in Q1. Not far behind are CIBC (27%), and RBC (26%). BMO didn’t break down amortizations for more than 30 years.
A Canadian bank notifies a borrower they have 72 years left to pay off their mortgage. Source: Twitter.
Long Mortgage Terms Were Nearly Non-Existent
One only has to look at the same period a year before to realize how unusual this situation is. Only three banks had amortizations longer than 30 years in Q1 2022—Scotiabank (1.4%), National Bank (1.3%), and TD (0.3%). Seeing 2 points would have been alarming, but over ¼ of mortgages at some banks is barely triggering a reaction.
Delinquency rates might remain low, but that doesn’t mean the country is in the clear. Housing has already diverted a significant share of capital from the “productive” economy. An economic slowdown at the expense of more debt only gets worse if the repayment of that debt is extended.