Bank of Canada watching trend of longer amortization periods among borrowers
The Bank of Canada is investigating a growing trend of borrowers extending their mortgage amortization periods amid persistently high interest rates and ongoing inflationary pressures.
During an appearance at Parliament’s Standing Committee on Finance, Bank of Canada Senior Deputy Governor Carolyn Rogers was asked by Conservative MP Adam Chambers whether she was concerned that as much as a quarter of some lenders’ mortgage portfolios have amortization periods well beyond 40 years.
Rogers told the committee the Bank of Canada asked this very question of several unnamed banks the previous week, and that lenders are concerned about ever-growing amortization periods.
“I think the banks are acutely aware that mortgages that are not getting paid down, that are not getting amortized down, is not a sustainable situation over the long term,” Rogers said. “But as we understand it, they’re working closely with these borrowers.”
Major lenders like RBC, BMO, and CIBC are seeing sharply higher percentages of their mortgage portfolios with amortization periods north of 30 years. None of these banks had mortgages with amortization periods over 30 years in October 2021. As of the fourth quarter, roughly 30% of their mortgage portfolios had amortization rates above 30 years.
Both Rogers and Bank of Canada Governor Tiff Macklem appeared before the Standing Committee on Finance on April 18 to explain the Bank’s latest moves to temper inflation. Macklem struck an optimistic tone about the rate of inflation—which has now slowed to 4.3% as of March from about 8% at its 2022 peak.
All in all, Macklem said, most people would consider the Bank’s current economic projections for 2023 to be the so-called ‘soft landing’ cited by economists over the last year—a period of very weak economic growth, instead of the retraction that signifies the beginning of a recession.
However, Macklem said borrowers renewing their mortgages this year will feel the bite of higher rates. The response to a 4.5% interest rate depends largely on a borrower’s financial situation, and the Bank of Canada’s own research suggests poorer households may be taking longer to pay down their mortgages.
“Those with enough resources could pay off some of their outstanding mortgage balance or make payments on their principal more quickly,” reads a passage from the Bank’s April Monetary Policy Report (MPR). “Financially constrained households, however, may scale back on voluntary repayments of principal or extend the amortization period of their mortgage when they renew.”
How mortgage borrowers are responding to higher rates
Meanwhile, mortgage borrowers are ditching 5-year-fixed rates and variable mortgages for shorter-term fixed rates. According to the Bank’s MPR, both 1- to 2-year fixed and 3- to 4-year fixed rates are on the upswing, comprising roughly 30% and 25% of all new mortgages in 2022, respectively.
By contrast, variable-rate mortgages dropped from about 55% of all new mortgages in late 2021 to 25% today.
Ultimately, the price outlook for Canada’s housing market is expected to recover, in spite of last year’s falling sales nationwide. The Bank expects house price growth to remain subdued for the first half of 2023, with activity picking up in the back half of the year.
Macklem pointed to Canada’s longstanding lack of robust housing supply and the pain of high interest rates as reasons for price declines. However, Rogers said the lack of supply is the most important factor in housing prices more broadly, one the Bank has pointed out for a long time.
“We do need, over the long-term, to deal with housing supply. That will be one of the most important things to relieve pressures,” she told the committee.
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