Nearly a quarter of mortgage balances at major banks in the country are rising rather than falling, and upcoming mortgage extensions threaten to make matters worse.
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With interest rates rising rapidly, about 20% of mortgages held by banks now have “negative amortization,” meaning the monthly payment does not cover the principal and interest.
Unpaid interest adds to the mortgage balance, which then increases over time instead of decreasing.
At BMO, 22% of home loans are in this situation, totaling $32.2 billion. CIBC has 19% of loans in negative amortization ($49.8 billion) and TD has 18% ($45.7 billion), according to third-quarter figures from major Canadian banks.
RBC and Scotiabank do not offer these types of products and therefore do not have these types of loans on their books.
“Because of these unique products, variable but fixed payment mortgages are possible.” It has never happened in recent history that so many loans are like this. Prices rose so quickly. We are seeing something new and it continues to grow,” explains Hanif Bayat, CEO of WOWA.ca, an online financial encyclopedia that closely tracks the Canadian real estate market.
A further increase would hurt
Hanif Bayat points out that the probability that the Bank of Canada will raise its key interest rate again by January is currently 80%, depending on the market.
But that doesn’t mean that the number of negative loans will necessarily increase, he adds. Everything will depend on what banks do in the coming months. “There are a lot of people out there who are able to pay a little more per month to cover the interest on their loan. But they will only do it if forced,” he said.
Lots of loans renew
A bigger problem is emerging. By August 2024, WOWA.ca calculates that 1% of the seven million mortgage loans in Canada (i.e. 70,000) will be renewed each month. Between August 2024 and July 2025, this number will increase to 105,000 per month.
“In my opinion, it’s worse than negative amortization loans. Negative depreciation, you can correct it by adding $150 or $200 more each month. But if we talk about renewal and go from a rate of 1.5% that we signed during the pandemic to, say, more than 6%, these owners will have to pay $500 or $800 more per month,” says Hanif Bayat.
“With every month that passes, the number of people feeling the pain increases significantly, even if interest rates remain unchanged,” he warns.
RBC, for example, needs to renew 41% of its mortgage loans within two years, he points out. At every major bank, more than a quarter of the loans have to be renewed within two years.