By Ketki Saxena
Investing.com -- Mortgage data from two of Canada's largest banks have shown a trend of homeowners grappling with increased borrowing costs. Royal Bank of Canada (TSX:RY) (RBC), the nation's leading lender, revealed that as of July this year, 43% of its residential mortgages in Canada had an amortization period exceeding 25 years. This is a significant increase from just 40% last year and only 26% back in January.
Mortgages with an amortization span exceeding 35 years have also increased. As recently as early last year, RBC did not offer such loans within their Canadian portfolio; today they account for nearly a quarter of their mortgage portfolio.
Similarly, Toronto-Dominion Bank (TSX:TD) reported that almost half its Canadian mortgages now have an amortization period over 25 years - up from just one-third last year. TD too has witnessed a surge in loan extensions beyond three decades.
Royce Mendes, an analyst at Desjardins notes that "The big six Canadian banks had more than 20% of their mortgage portfolio with repayments greater than thirty years".
Why are amortization periods increasing in Canada?
In less than eighteen months, the Bank Of Canada has hiked its policy rate by a whopping four hundred seventy-five basis points, causing mortgage payments across Canada have to soar.
To maintain stable repayments amidst rising borrowing costs many major Canadian banks have allowed holders to extend their variable rates' mortgage periods.
While this strategy offers temporary relief it also introduces future risks: The interest payment portion is no longer covered by the regular mortgage payment resulting in negative amortization along with a growing debt balance.
Data released by BoC indicates about one-third of homeowners experienced higher payments compared to February earlier this year before interest rates began climbing.
The Risks of Extended Amortization Periods
These escalating interest rates coupled with lengthening amortisation periods and overall payments are posing challenges not only for homeowners but also creating headwinds for local banking institutions.
Canada's prime lenders besides witnessing slower growth on new mortgages felt compelled to earmark additional funds covering bad debts during Q2 anticipating defaults plus weakness within the commercial real estate sector.
Apart from the potential risk homeowners face there is wider concern regarding the impact on the country’s economy due to surging levels of housing debt, flagged by the Office Of Superintendent Financial Institutions (OSFI) – a financial watchdog overseeing all federally regulated financial institutions including banks.
OSFI has urged lending agencies to tackle looming threats arising out of extended term amortization terms at the earliest opportunity emphasizing risk accumulation within bank books.
"OSFI expects a more prudent and active account management approach, including resolving negative amortization at the earliest opportunity as well as recognizing the higher risk of these loans in loss provisioning," the regulator said in a statement.
"Our ongoing conversations with financial institutions have highlighted the importance of being proactive in managing all types of mortgage accounts, and to act before levels of borrower stress become unmanageable."