Mortgage amortization periods continue to grow at BMO due to rising interest rates, but the bank said about a fifth of its variable-rate clients have preemptively increased payments.
The issue of growing amortization periods isn’t unique to BMO, but is being seen among static-payment variable-rate mortgage clients at other big banks as well. That’s because as the Bank of Canada has increased rates over the past year, those with fixed-payment variable mortgages have seen the portion of their payment dedicated to interest cost soar.
For some, their entire monthly payment now goes towards interest, which has resulted in negative amortization, whereby the amortization period is growing.
BMO said it doesn’t require those clients to increase their payments until the mortgage comes up for renewal, at which point the contract reverts to the original amortization schedule, “which may require additional payments,” BMO said. About a fifth of BMO’s mortgage book will come up for renewal in the next 12 months.
“As part of the strong relationship, it’s not for us to tell them to pay more now,” Piyush Agrawal, BMO’s Chief Risk Officer, said during the bank’s first-quarter earnings call.
“The product allows them to pay as and when they are able. Several customers have taken us up and 20% have actually put more money in,” he added. “But we think that the average increase, by the time of renewal, is absolutely manageable for our customers.”
BMO has seen the share of its mortgages with a remaining amortization above 30 years swell to nearly a third of its portfolio as of Q1. That’s up from zero a year ago.
Of BMO’s $142-billion mortgage portfolio, 44% has variable rates.
Remaining amortizations for BMO residential mortgages
|Q1 2023||Q1 2022|
|30 years and more||32.4%||0%|
However, the bank said it remains confident in the ability of its mortgage customers to keep up with their payments.
“Overall, our performance in the mortgage book continues to be very solid,” Agrawal said. “We’ve obviously looked at various internal measures, capacity analysis. And just given the strength of the Canadian customer’s capacity to pay, we feel very good about the future.”
Mortgage book remains “solid,” but is expected to moderate
BMO continued to see robust growth of its residential mortgage book in the first quarter, which grew 11% year-over-year.
“Our strategy has been to grow at above market,” said Erminia Johannson, Group Head of North American Personal & Business Banking. “Over the past…12 months, we’ve acquired a significant increase to our sales team, and we’ve been digitizing our mortgage process so that we are a more effective kind of originator of mortgages.”
Johannson noted that part of that growth is the completion of originations that began months earlier, and added that the bank expects to see a moderation in activity in the coming quarters.
“We obviously have been benefiting from the fact that [we] have a pipeline that obviously has a long duration to get through to [the] balance sheet, and that’s what you’re seeing coming through,” she said. “Right now, we’re seeing originations down the same amount that the market is down, so you can anticipate…some moderation going into the back half of this year, just as the mortgage market has adjusted.”
BMO earnings highlights
Q1 net income (adjusted): $2.3 billion (-12% Y/Y)
Earnings per share (adjusted): $3.22
|Q1 2023||Q4 2022||Q1 20212|
|Residential mortgage portfolio||$141.7B||$139.4B||$129.5B|
|Percentage of mortgage portfolio uninsured||70%||69%||66%|
|Avg. loan-to-value (LTV) of uninsured book||51%||52%||49%|
|Portfolio mix: percentage with variable rates||44%||44%||NA|
|Mortgages renewing in the next 12 months||$23B||$23B (12%)||NA|
|% of portfolio with an effective amz of <25 yrs||54%||55%||77%|
|90-day delinquency rate||0.13%||0.11%||0.13%|
|Canadian banking net interest margin (NIM)||2.70%||2.72%||2.68%|
Source: BMO Q1 Investor Presentation
- “The quarter-over-quarter increase in embedded PCL is consistent with the expected normalization trend in delinquency rates in unsecured consumer loans and credit cards, which still remain below pre-pandemic levels,” said Piyush Agrawal, Chief Risk Officer. “For real estate secured lending, we continue to view the risk from higher rates as modest, given a high credit quality borrower base and low LTVs.”
- “The total provision for credit losses was $217 million or 15 basis points, down $9 million or 1 basis point from prior quarter,” Agrawal added. “Impaired provisions for the quarter were $196 million or 14 basis points flat to the fourth quarter. The strong impaired loan performance is due to low formations, which continue to be below pre-pandemic levels. We do expect impaired provisions to return to more normal levels over time.”
- “The riskier segment renewing over the next 12 months is nominal given our portfolio quality,” Agrawal said.
Source: BMO Q1 conference call
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