Canadian banks see fewer number of borrowers with growing residential mortgage
Canadian banks are seeing fewer borrowers with ballooning residential mortgages, but $94-billion of home loans are still troubled.
For the second straight quarter, fewer borrowers are seeing their loans increase in size – also known as negative amortization.
Bank of Montreal, BMO-T +0.72% increase Toronto-Dominion Bank TD-T +0.91% increase and Canadian Imperial Bank of Commerce CM-T +2.07% increase had a total of $94-billion in residential loans in negative amortization in their first fiscal quarter ended Jan. 31, according to their financial results released this week. That is down from $110-billion in the fourth quarter ended Oct. 31 and $130-billion for the period ended July 31.
BMO, TD and CIBC are the three major Canadian banks with mortgages that permit negative amortization – a product the federal bank regulator has now called “dangerous” even though these loans have been around for years.
The decline in negatively amortizing loans suggests that borrowers have been making higher monthly payments to cover their interest costs or have sold their properties and discharged their mortgages.
Bank mortgages are designed to shrink in size as borrowers pay down a portion of their interest and principal every month. But the Bank of Canada’s aggressive interest rate hikes exposed problems with the most popular type of variable-rate product in the country: The variable-rate mortgage with fixed monthly payments.
When borrowers’ fixed monthly payments are not large enough to cover the higher interest payments, that unpaid interest is added to their loan principal and the mortgage negatively amortizes.
BMO had mortgages worth $23-billion in negative amortization in the first quarter, representing 15 per cent of its Canadian residential loan book, according to its financial disclosures. That is down from $30-billion, or 20 per cent of its portfolio, in the fourth quarter and $32.8-billion, or 22 per cent of its portfolio, in the third quarter.
r cent of its Canadian residential mortgage book. That compares to $43-billion, or 16 per cent of its portfolio, in the fourth quarter; and $49.8-billion, or 19 per cent, in the third quarter.
Royal Bank of Canada does not allow mortgages to negatively amortize.
Bank of Nova Scotia’s variable-rate products do not have fixed monthly payments for the most part, so as interest rates rise, so do payments.
BMO said many of its borrowers are “taking action, resulting in a significant reduction in mortgages” that are negatively amortizing. CIBC and TD did not address this on their conference calls.
With a fixed monthly payment, more of the borrower’s payment goes toward interest costs and less toward the loan principal whenever interest rates rise. As a result, the amortization period lengthens.
The share of bank customers with amortizations greater than 30 years has been declining.
At BMO, the share of borrowers with longer amortizations was 25 per cent in the first quarter compared with 27 per cent in the fourth quarter.
At TD, it fell to 19 per cent from 21 per cent over the same period. At CIBC, it declined to 22 per cent from 24 per cent. And at RBC, it eased to 21 per cent from 23 per cent.
This article was reported by The Globe and Mail
