Canadian first time home buyers are 36 years old on average. That means they won’t have that starter condo paid off by the time they retire, according to recent bank reports. Four of the Big Five banks reported a large share of their portfolio had amortizations longer than 30 years in Q2 2023. Most of them have at least 35 years or longer remaining, as they extend terms to prevent over-leveraged buyers from defaulting.
Negative Amortization
An amortizing loan is one that’s gradually paid off over time, with each payment reducing the balance. Banks in Canada are limited to offering a maximum amortization of 30 years, meaning you have about 30 years to pay off the loan. Make your payments to cover the interest plus some principal, and you get close to zero. Straightforward, right?
In circumstances where the payment is insufficient to cover interest, it begins to accumulate. Rather than the balance getting closer to zero, it increases as time passes. This is called negative amortization, because the time required extends rather than winding down.
A combination of inadequate stress testing and poor regulatory control has led to a lot of negative amortization. Despite being limited to 30 years at contract, banks estimate the “current customer payment basis” will be longer. Sometimes a lot longer.
1 In 4 Mortgages At Big Five Banks Have 30 Years or Longer Left
A large share of the mortgage portfolios at Canadian banks have amortizations longer than 30 years. Leading is BMO (31% of its portfolio), followed by TD (27%), CIBC (27%), and RBC (26%). Many assumed it was a temporary issue last quarter, and would resolve by Q2 2023. That wasn’t the case, with these banks only reporting slightly lower rates than last year.
Most of those are mortgages with amortizations 35 years or longer, as reported by the banks. The share of the Canadian mortgage portfolio with amortizations 35 years or longer was 25% at CIBC, RBC, and TD, respectively. Unfortunately, BMO didn’t break down numbers beyond 30 years or longer.
Only one of the Big Five proved to be an exception—Scotiabank. Just 0.7% of its mortgage portfolio were amortizations of 30 years or longer in its latest earnings.
National Bank has a much smaller portfolio, and has yet to report its earnings. However, it didn’t have many mortgages with amortizations 30 years or longer last quarter, and it likely hasn’t added many.
It’s Not Your (De)fault, The Bank Regulator Is Touting The Virtues of Longer Amortizations
The practice may not be an official thing in Canada, but it seems to have the regulator’s blessing. Earlier this month, OSFI wrote to Parliament to explain that removing the ability to extend mortgage amortizations might result in more delinquencies and create downward pressure on home prices. More delinquencies and lower prices being a less than ideal scenario for the demographics elected officials cater to—themselves.
OSFI touting the virtues of extending amortizations is a big change from their plans. The regulator recently floated the idea of amortizing home equity loans to reduce the idea of perpetual debt floating around. This is basically the opposite, and they sound like they’re making the best of a problem they no longer control.
It sounds noble to prevent defaults this way. Needed, even. However, existing owners are paying much less than average rents, and usually for a lot more space. Buyers prior to 2021 also likely secured their home for significantly less than recent market prices. An increase in payment is unlikely to be burdensome to most, considering stress testing started in 2018.
That leaves recent buyers as the biggest group that needs these longer amortizations. While you might be thinking they’re first-time buyers that need a break, the odds are they’re investors. Over leveraged investors that can’t pay their mortgage and require special accommodations to prevent default sounds familiar, but it’s hard to remember where from.
By allowing these extended amortizations it’s really creating a false market.
It’s giving people the ability that would normally be walking away from their property which they probably should do in some cases to hang on.
I’m sure that there are a majority of these mortgages that are probably 50 years or more.
BUYERS should BEWARE in this environment.
This is a fake market, and the prices are still going to continue to correct even though they’re trying this bailout.
Anyone who has any comprehension of the way the market should be behaving right now, is that the prices should be dropping and that should continue for quite a while.
So OSFI is basically allowing banks to put a floor on house prices, therefore protecting the bank’s collateral and preventing a price correction. This approach works at cross purposes of
So OSFI is basically allowing banks to put a floor on house prices, therefore protecting the bank’s collateral and preventing a price correction. This approach works at cross purposes of the Government of Canada’s attempt to develop affordable housing. It is overpriced house prices that is creating the housing prices. They need to correct in order for people to move along the housing continuum. As a homeowner I think they need to let the correction happen, but that would guarantee politicians would lose their jobs in the process. The whole system and policy framework is captured by those with financial and political interest to keep the status quo.
THIS IS INSANE!!
I totally agree Average Man… we just applied for a standard mortgage yesterday and within hours were told we were approved and could have one for as long as we wanted – 35-40-45 years…. I laughed at the moron and said “I am too old for that and will be dead by then”… He went on with his “sales pitch” that we can set it up any way we like so as long as we get “in”… meaning what? So long as we get trapped in this scham of an RE market, where these new amortizations quite literally make you a slave for your entire life and perhaps even your children’s lives as the bank (gov in sheep’s skin) co-owns your home forever and has the upper-hand. Is this what Schwab and his band of thieves meant by saying “You will own nothing and be happy”? Prices will never come down to healthy levels if banks have been allowed to get away with this. The grandest Ponzi bailout scheme ever.
I want to congratulate and thank the writers and editors at Better Dwelling. This site is beyond any doubt the only site that tells things as they are with no sugar coating or hidden agenda. You guys are the best.
Ultimately the Gov is on the hook for defaults so they are just protecting their own interest.
Investors should be using commercial mortgages, residential mortgages are for homes, not “investments”.
Go to sleep flock of sheep! If you don’t take charge of your life, the wolves in charge will and they know you won’t lift a single finger. Hahahaha
Congratulations RE industry and politicians (which will be the same soon). You enslaved financially the young generation…Yaaaay!!!
let’s see if you delete this comment as well?
Please help me, my mortgage calculator crashed. I would like a mortgage at 5.5% for 200 years. What is the monthly payment?
These people are playing with words in every area of human activity. “negative amortization”, negative growth and so forth so on. It is all done to brainwash and pacify the the people to misled the people and continue benefit at the expense of majority. They are dead set to not allow market forces which they are according to their own words worship. They are all for market economy and markets would make them lose tons of the illusionary wealth. Current problems lie not in taxes, foreign buyers, immigrants, regulations. It is just all part of the system that is trying hard to make every single human need an investment to make it grow and bring constant cash flows. What investment must do? It must grow in value which is what housing has been doing. What would you expect? Housing is the very basic human need. If this system cannot fulfill its duties of providing people with place to live at reasonable prices, who needs this system and those who represent it?
Basically the trend is on to turn housing into privilege for very few and for the rest it is either multigenerational debt slavery, living in hen house condiution in extremely expensive and small cubicles or ultra expensive rentals where it might come back to situation when people basically had to share room or some even paid for half bed.
The problem had long turned form economical to political because this regime in Canada be it liberals or conservatives are basically eating form same pot and people who benefit form this abomination and madness are actually in control.
The banks will do ANYTHING to keep the price of housing high. And when they fail, they know that this government will come to their rescue. Disgusting.
Slaves
Car payments are similar.
links to the references?
Moved back to Canada last August after 31 years in the USA. Moving directly into the largest real estate bubble in the history of Canada has been great. Figuring out that it was unsustainable at the new interest rates created hope. Canada’s big banks skirting the issue of people overleveraged took the hope of buying a reasonably priced home away again. What a ride it has been watching this dynamic unfold. Very unpleasant unfortunately for anyone who does not already own a home in Canada.
Hello Bob,
I am in the same boat as you. Returned in 2021 after 23 years abroad, living in peaceful bliss… and now just one headache after another trying to get into the biggest bubble, scam of a market. It keeps running away with the banks bailing out folks who should have drowned in debt and been forced to sell. After being told by two realtors that this is just a “game” and to either play it or walk away from it, I realized how messed up Canadians way of thinking is with regards to RE, and that it is just a commodity and not a necessity to those heavily invested in it. I am personally tired of the game, severe buyer’s fatigue after a failed attempt to find a house one and a half years later and dozens of viewed homes later… I give up and am considering being an expat again. Thank you to all who are responsible for destroying a place I once called home and looked forward to returning to. Now I can’t wait to get out of here. I think it is a real shock for any returning Canadian who spent decades abroad to come “home” to the current state of affairs.
Take care
The extreme correction that was much anticipated by bargain hunters turned out to be mirage for various reasons .
More and more buyers are realizing this and returning to the market to buy the dip, adding even more support to the housing prices.
The longer you wait…
That’s where you’re wrong. That “extreme correction” hasn’t happened yet. We first need to enter into a recession and everyone and their mother knows that a recession is coming. The calm before the storm. Get the popcorn.
Bob (I used to watch your show and talked to you a long time ago)…
I know what you’re thinking, but this is only going to delay the inevitable.
The prices are still going to keep dropping unfortunately we probably would have been at the bottom in 2025, we may not reach it now until 2026 and then your pretty much guaranteed that we’re going to be looking probably at around 2040 before the prices go back to what people paid a year in a bit ago.
I advised somebody tonight that they’d be better off to sell today and sit on the cash for the next year and a half to 2 1/2 years and wait it out.
Anyone who thinks otherwise… it’s a pipe dream.
I have worked through four of these booms and busts and this bust is going to be the worst of all.
It’s going to match the boom part but in reverse, see you in 2026 and we’ll see what happens then.
Personally I see lots of upside for the buyers waiting to sit on the sidelines until the prices hit bottom!
This means that 25% of mortgage holders are barely paying off their loan. Some are probably essentially only paying interest. Wounder what happens when they want to sell.
The reason for the banks taking this crazy unprecedented plan of attack, is that most of these houses are worth 30 to 50% less than what they paid.
The banks are going to get a lot of pain…..
By doing this it is going to delay the inevitable.
So if there is any common sense left it would stand to reason that what should be happening now is price drops.
But this is going to delay them so that this downturn is going to continue for longer.
People are going to be able to hang on longer before they finally come to the realization that it’s better to take the loss than to hang in there for the next 15 years hoping that the prices go back to what they paid 2 short years ago.
I see this is a stall tactic of the banks, inevitably I don’t believe it’s going to work. I just believe that instead of 2025 things might have turned around we might be looking at 2027 because it’s going to take longer.
They lose everything!
Equity is gone…and they owe the deficit.
There is nothing inherently wrong with 40 or even 50 year amortization periods. It more closely replicates the renting experience. If an 80 year old still has a small mortgage when he dies, his estate pays it off before collecting the proceeds. I do wish Canadians could access 30 year fixed rates like Americans can. Would reduce risk.
Will Canadian banks and politicians never stop thinking of ways to artificially prop up the housing market? Literally everything they do just makes the problem worse in the long run. If they had just kept their hands off the situation for the last couple decades and allowed for some gentle pendulum swings we would all be better off. It wouldn’t have just helped the housing situation, but our economy and industry as well. Instead of investing in businesses and innovation, everyone with money just buys property, because why not? It’s been a never ending gravy train.
What do they think is going to happen in 40 years when everyone is still paying off their mortgages and no one can afford to retire?
It’s sort of ironic that so many people left Europe for North America because they were tired of extreme economic inequality. Now here we are recreating an inheritance based society. We’ll just be left with landowners and debt slaves.
As mortgages make up a significant portion a banks balance sheet, this news is not just bad news for those who recently purchased, but for all those with deposits in the bank. I think that the only way to sort out this real estate bubble and keep the voters somewhat happy is to extend mortgage amortizations. Homes will be generational in nature, ie taking a couple of generations to pay it off. With that, house price can stabilize at their current values while new buyers can enter the market under a new paradigm. Lender defaults will help bring house values back down, but will also have very damaging market implications for lending institutions. In Canada, we are limited to 6 banks, a few credit unions, some alt lenders and that’s it. In the US there are over 1,600 regional banks. If some collapse like we have seen, there can be containment. Here, should any of the banks collapse, then it is game, set and match. Even for those who think they are safe.
https://www.thestreet.com/technology/elon-musk-warns-homeowners-about-the-value-of-their-homes
Technically right now the government is preventing the inevitable. I extending all these amortizations it’s keeping people in houses that should be going into default and walking away. The prices are going to keep falling and a lot of these people would be wiser to walk away now then to walk away when the price is finally do drop more.