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  • Ephraim Vecina

Borrowers drastically extending mortgage amortizations to manage costs: analysis



Canadian banks have started permitting customers to stretch out their payments


Data from Canada’s largest banks show that a growing number of homeowners are choosing to extend their mortgage amortization periods to cope with mounting costs, according to an analysis by Bloomberg News.


In contrast to their counterparts south of the border, Canadian banks have started permitting customers to stretch out their payments over much longer periods, some lasting several decades.


“The situation has also brought about the return of mortgages that are amortized for more than 35 years,” Bloomberg News said in its analysis.


This is to help Canadian homeowners bring down their monthly payments after the central bank’s rate-hike campaign that saw the benchmark interest rate spike by 475 basis points in less than 18 months, settling at a 22-year high of 5%.


“Unlike in the United States, it’s difficult for homeowners to lock in their rates for long periods,” Bloomberg said. “Most either have mortgages where the rates are fixed for one to five years, or variable-rate mortgages that reset with every move in the central bank rate.”


In RBC’s case, its posted rate on variable mortgages surged from approximately 2.5% before the Bank of Canada started its rate hikes in March 2022, to above 7% currently.


“At the start of last year, [multi-decade amortizations] didn’t exist in RBC’s Canadian mortgage book; now, such loans represent 23% of the portfolio,” Bloomberg said.


Extended amortizations will not improve housing affordability, CMHC head says


Romy Bowers, president and CEO of Canada Mortgage and Housing Corporation, recently said that multi-decade mortgage amortizations will have at best a minimal impact on housing affordability, even as she acknowledged the upward spike in homeowners’ bills over the past year.


Bowers said that the main danger in lengthy amortization periods was that it could lead to greater purchasing power among borrowers – which could then spur them towards more transactions, ultimately making their monthly spending larger.


“That seems like a quick fix,” Bowers told The Canadian Press. “If you just have 30-year amortization, everyone’s mortgage payments will go down by $200 and they can actually afford the house, but if you’re in a supply-constrained market and that’s your solution, it’s not going to solve the problem in the long term.


“That just makes credit more available. It lowers the monthly payment, but it actually increases the cost to the homeowner over time.”

Ephraim Vecina Share August 29, 2023

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