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BMO Q4 earnings
Toronto, ON, Canada - December 22, 2022: The logo and brand sign of Bank of Montreal BMO branch in Toronto, Canada (Photo by Anatoliy Cherkasov/NurPhoto via Getty Images)

Some mortgage clients could see up to 40% payment increases at renewal, BMO says

Like most other financial institutions, BMO said the bulk of its mortgage portfolio will be up for renewal in the coming three years, with the payment increases averaging up to 40%.

In its fourth-quarter earnings call, the bank said just 11% of its portfolio—or $16.2 billion worth—will renew in the next 12 months. The majority is then set to renew in 2025 ($27.6 billion) and 2026 ($55.8 billion).

Of its clients who have already renewed their mortgages, BMO said the average increase to their regular payments has been 21% for fixed-rate borrowers and 22% for those with variable-rate mortgages. Given that those are averages, some borrowers have seen smaller increases while others have seen their payments rise by more.

And as those who secured rock-bottom rates during the pandemic start to see their rates reset in the coming years, BMO says the payment increases will grow larger.

“We do see people having to face a 30% increase this year,” said Ernie Johannson, Head of BMO North American Personal and Business Banking. “That will get higher as we move into ’26 because—if you assume no rate decrease—there would be customers who would potentially be facing 35% or 40%, at that tail end.”

Despite the increases, BMO says borrowers have so far been able to handle the higher rates.

“We’ve seen an ability for consumers to adjust and be able to afford the increased payment,” Johannson added, noting that they were stress tested at a higher rate at origination and that many are also seeing an increase in income that is helping to offset the higher payments. “We feel pretty confident that there is an…ability to be able to handle that increase.”

Rate cuts could also lessen the payment shock for renewals taking place in 2026, added Chief Risk Officer Piyush Agrawal.

“A larger portion of our portfolio renews in 2026, by which time we expect interest rates will have moderated and customers will have had time to prepare,” he said.

Delinquency rate remains low, and clients still have payment buffers

BMO reported that its 90+ day mortgage delinquency rate remains low at just 0.14% of its portfolio, unchanged from the previous quarter and up from 0.11% a year ago.

Of its variable-rate mortgage portfolio, the bank said about 62%, or $29.8 billion worth, are currently negatively amortizing, meaning the monthly payments aren’t enough to cover the total interest cost, which is being added to the principal balance.

This is a situation unique to fixed-payment variable rate mortgage products, which are offered by BMO, CIBC and TD. While RBC also offers fixed-payment variable rate mortgages, it does not allow its mortgages to amortize negatively.

“We are proactively reaching out to customers, particularly our variable-rate customers,” said Agrawal. “We’ve had a positive customer response to the outreach, resulting in a reduction in mortgages in negative amortization from the prior quarter.”

Agrawal also said the bank’s analytical insights show clients are changing their behaviour and are “adjusting to the new reality” of higher interest rates. That includes a decline in credit card spending, particularly for discretionary items.

He also pointed to a still strong savings rate of 5%, with increased amounts going into investments. “So, there are buffer mechanisms,” he noted.

The bank has also seen the percentage of its mortgages with amortizations above 30 years ease back to 27%. That’s down from nearly a third of its portfolio in late 2022.

Remaining amortizations for BMO residential mortgages

Q4 2022Q3 2023Q4 2023
16-20 years13.5%13.4%13.6%
21-25 years32.3%31.6%32.1%
26-30 years13.8%15.8%18%
30 years and more31.3%29.8%27%
Remaining amortization is based on current balance, interest rate, customer payment amount and payment frequency.

BMO earnings highlights

Q4 net income (adjusted): $2.15 billion (+0.1% Y/Y)
Earnings per share (adjusted): $2.81

Q4 2022Q3 2023Q4 2023
Residential mortgage portfolio$139.4B$135.5B$150.6B
HELOC portfolio$47.3B$48.5B$48.7B
Percentage of mortgage portfolio uninsured69%71%71%
Avg. loan-to-value (LTV) of uninsured book52%55%54%
Mortgages renewing in the next 12 months$23B $21B$16.2B
% of portfolio with an effective amz of <25 yrs55%54%55%
90-day delinquency rate0.11%0.14%0.14%
Canadian banking net interest margin (NIM)2.72%2.77%2.77%
Provisions for credit losses$226M$492B$446M
Source: BMO Q4 Investor Presentation

Conference Call

  • BMO reported that its capital position continued to strengthen with a common equity ratio of 12.5%, up 20 basis points from the prior quarter.
  • “Given our current outlook for higher for longer rates and the lagged impact from these interest rate increases, we expect impaired loss rates to trend somewhat higher from Q4 levels in the range of low-30 basis points, still below our long-term average and then improve as the rate start to come down and the economy begins to strengthen further,” said Chief Risk Officer Piyush Agrawal.
  • “Given our strong risk management capabilities, the quality of our portfolio and prudent allowance coverage, we remain well-positioned to manage current and emerging risks,” Agrawal added.

Source: BMO Q4 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Featured image: Anatoliy Cherkasov/NurPhoto via Getty Images