Canada’s highly indebted households are now too indebted for prudential management. After a low rate, investor-driven home buying spree, many borrowers are unable to keep up with rising rates, despite having been “stress tested” for a similar scenario. As a result, banks and regulators granted temporary extensions to the maximum period a mortgage can be repaid. The problem was supposed to be mitigated as quickly as possible, but recent bank filings show most Big Six banks have mortgages on their books with a remaining amortization that far exceeds the maximum limit.
Canadian Mortgaged Are Limited To 25-Years
Canadian mortgages are generally limited to a maximum amortization, preventing predatory lenders from saddling households with debt and perpetually collecting interest. That maximum amortization has creeped higher over the years, but they’re generally limited to 25-year terms at Federally Regulated Financial Institutions (FRFI). According to the banks themselves, special circumstances may allow some uninsured mortgages to assume a term of 30-years.
Despite boasting of prudential enforcement, Canada’s households became too indebted to fail. Now lenders are sitting on a significant share of mortgage with amortizations at least a decade longer than the limit.
Canadian Banks Still Have A S!%t Ton Of Mortgages With More Than 35 Years Remaining
Despite the limit, Canada’s Big Six banks are sitting on a substantial share of loans with over 35 years remaining. Second quarter filings show over a fifth (21.3%) of BMO’s Canadian mortgage portfolio had remaining amortizations longer than 35 years. It was followed by CIBC (20%), RBC (19%), and TD (16.5%)—in that order.
The two remaining Big Six banks had insignificant shares with such long amortizations. This is largely due to the fact that they generally don’t offer the type of mortgages that created the mess in the first place.
Canadian Bank Regulator Fears Forcing Compliance Will Cause Defaults
The biggest driver of this trend was the brief surge in variable rate mortgages with fixed payments. Like typical variable rate mortgages, these loans see interest costs fluctuate with the overnight rate. However, rather than the payment size changin, the amount applied to interest costs shifts.
These aren’t particularly popular in Canada, but the investor surge in the 2020s helped to market these incredibly low rate loans. An unexpectedly sharp climb to interest rates shifted the share applied to principal to virtually nothing—in some cases, negative. This effectively made a portion of these loans negative amortizing, meaning the longer the loan exists, the longer it takes to pay off the loan.
Canada’s bank regulator isn’t keen on such long terms, but they’re not thrilled about delinquencies either. As a result, OSFI has warned lenders they should work with borrowers, and adopt the shortest amortization that won’t cause hardship. Stating the issue needs to be corrected is one thing, but without any firm rules on testing these borrowers, it’s mostly just talk.
At the same time, Canada’s policymakers are getting more comfortable with longer amortizations. Starting August 1, the tentative plan is to allow first-time buyers with high-ratio, insured mortgages to amortize mortgage on new construction for up to 30-years.
The state-backed mortgage insurer is also planning to extend amortizations to 55-years for developers. They specify this is partially to help with default mitigation as well.
It appears that long, predatory loans are only a theoretical problem. Maximum amortizations seem to be extended whenever there’s a need to inject more credit into the system. Canada’s prudentially managed financial system in action.
OSFI doesn’t matter these days. We lost appearance of an independent central bank and regulator when the government started controlling whether banks can accept delinquencies or not.
Would be surprised if banks actually execute any of the IFRS 9 guidelines regarding investor risk.
Canadas govt is clearly now run by banks. The unmitigated immigration, liberalization of credit and loan sharks in the market, combined with compliance from Ottawa allowing ever more unaffordable lending has left Canada in a mess.
Now not only can’t the govt allows natural correction in housing prices, instead focusing on the fictitious ‘supply’ argument, because it would reveal the terrible mismanagement by Trudeau, but the big 6 banks themselves would quickly face insolvency? With more than $1B in delinquencies just on mortgage debt, Canada is facing a generational economic crisis, entirely of the Trudeau govt’s making.
OSFI hit TD with its largest fine ever IIRC. It was $19 million.
The US is expected to hit TD with a billion dollar fine for a similar issue, but they actually had the ability to execute further investigation into why it didn’t follow through with its promised crackdown.
Canada is lucky banks used to listen to OSFI, because they effectively have no power in contrast to other countries. Might as well not have a regulator.
True this. Routeledge is saying the right things and implementing the right measures, but finance is focused on propping up investors.
Crisis doesn’t happen overnight. It happens after repeatedly trying to mitigate risk rather than contain it. They might be able to patch over this, but they’re risking a relatively minor issue for the whole financial system.
Good news. The capital gains hike will be enough to pay off the inevitable bank bail out.
“TD money laundering fine could double to $4 billion”
https://www.amlintelligence.com/2024/06/td-bank-money-laundering-fines-could-double-to-disastrous-4bn/
“Slowly at first and then all at once.” That’s how it happens. Without exception. Always. They are still in the “first” part. Muddling along, fooling around and trying to convince themselves that it’s salvageable, unaccepting of the grave situation. The closer they get to the ‘event window’, the more the gravity of the situation will weigh on them. Their eyes will get very wide as the inevitability of it sinks in, as the enormity presents itself. Some of the politicians and bankers and otherwise ‘leaders’ will do some really ‘out there’ stuff. And then it will hit, and everyone will pay.
Canadian Government needs to use the proceeds from the carbon tax to help Canadians pay their mortgage.
Just redirect the money to those with mortgages to lessen the pain and help.
Keep your support for the NDP out of the market please. We’re already becoming insolvent as a nation under current leadership.
I’d like to know what the amortizations are really at.
I suspect closer to 75 years.
There is no reason why my money needs to be taken to pay delinquent mortgages. I can’t afford to buy into housing because the price has gone atrociously unreachable. You’re going to have a very hard time convincing everyone that this is a good idea and any government that tries to do this is going to become grossly unpopular.
Trudeau needs to get involved here and have the government guarantee home prices to ensure that prices do not fall. The economy depends it and so does retirement for millions.
Do the right thing!
The economy needs to find a better way forward. Relying on the real estate market won’t sustain.
If Trudeau is going to guarantee home prices, then he might as well guarantee my investment portfolio.
Where is the research showing that 25 year amortization is ideal? Why not 20? why not 15 years? Why not 10?
Japan and Switzerland have intergenerational amortization of 100 years.
Finland has 60 year amortization. Are these better or worse?
Why do we interfere with what should be a market decision between the lender and the borrower. Because we have to “protect” people from themselves? Get out of the way, if someone wants to amortize over 75 years and someone is willing we provide the loan, so be it. If the loan doesn’t perform, let the bank take the hit or extend the loan, and the shareholders can decide if its the right choice by changing the directors or selling their shares.
Manipulate all they want but in end when customers can’t pay it all collapses. Jobs are disappearing and so are the investors.
The stress test was 2.25%. rates rose to over 5%. That is Double the stress test plus. No wonder there are problems.
And I’m sure a lot of the stress tests didn’t take into consideration all of the inflation that have added to other costs over the last few years
They need, better solutions. Great extend it to 30 years, or even 40 years for larger mortgages. Re-write the loans with new pre-payments options allowing larger pay down percentages without penalty.
Also upon rewriting, they could extend further credit if the borrowers don’t have the cash, allowing them to buy the interest rate down. This would also re-stimulate the bond market. Or perhaps CMHC participates and pays for the rate buydown, be way cheaper than foreclosing. Where’s the brain power in gov. insurance and banking?
After all that came to light in 2007-08 you’d think better policy and regulation would be the result. It’s better to rip the bandaid off and allow some foreclosures while many are in a position to refinance opposed to waiting until the market is an oozing, infected wound ready to burst.
If we’re already at the point where defaulting will result in a banking collapse, it may be too late. Unfortunately the government (and I don’t just mean Trudeau’s Liberals, but Tories as well) are owned by investment bankers and real estate speculators, and we, the working Canadians who prop up not only the country but their investment portfolios, will pay the price as usual.