CIBC Square in downtown Toronto on Sept. 29, 2021. New data from CIBC show that 20 per cent of the bank’s mortgage holders are seeing their loan balances increase.Fred Lum/the Globe and Mail
Twenty per cent of Canadian Imperial Bank of Commerce mortgage holders are seeing their loan balances grow, as rising interest rates make it harder for them to pay off their homes.
New data from CIBC show that $52-billion worth of mortgages – the equivalent of 20 per cent of the bank’s $263-billion residential loan portfolio – were in a position where the borrower’s monthly payment was not high enough to cover even the interest portion of the loans. The bank has allowed these borrowers to stretch out the length of time it takes to pay off the loan, which is known as the amortization period. As well, borrowers are adding unpaid interest onto their original loan or principal.
The disclosure, contained in a footnote in CIBC’s recent quarterly financial results, is the first from a major bank outlining the amount of variable-rate loans where payments no longer cover interest costs.
It shows the financial duress homeowners are under because of the jump in interest rates. It also highlights the growing risk borrowers face when it comes time to renew their mortgages and their amortization periods are required to shrink back to the lengths of time specified in the original contracts. Then, the borrower will face much higher monthly payments.
“It’s absolutely a sign of stress to come. It’s just the stress isn’t here yet,” said Mike Rizvanovic, financial services analyst with investment bank KBW.
CIBC and most of the other big Canadian banks offer variable-rate mortgages that have fixed monthly payments. That means when interest rates increase, more of the borrower’s fixed monthly payment is used to cover the interest expense. The borrowers’ payments remain steady because their amortization periods are automatically extended.
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Borrowers can reach a trigger rate, which often requires them to make higher monthly payments so that they are always reducing the size of their loan.
But CIBC’s variable-rate product allows borrowers to go past the trigger rate and stick with payments that don’t cover the full amount of the interest owed, up to a certain threshold. The unpaid portion of the interest is deferred and added to the mortgage principal and the borrower’s loan balance grows, or negatively amortizes.
Asked whether borrowers with negative amortizations will be able to handle the higher mortgage payments at renewal time, CIBC pointed to comments its chief risk officer said on its recent conference call.
“At this time, we still only see a small portion, less than $20-million, of mortgage balances with clients we see as being at higher risk from a credit perspective,” Frank Guse said.
“We actively monitor our portfolios and pro-actively reach out to clients who are at higher risk of financial stress,” he said according to a transcript provided by CIBC. “Overall, our mortgage portfolio is well positioned and continues to perform well within our expectations.”
At least two other major lenders, Toronto-Dominion Bank and Bank of Montreal, offer similar products that allow mortgages to negatively amortize. However, TD and BMO did not provide any disclosure on the share of borrowers that have a negative amortization. TD did not respond to a query on the matter. BMO spokesman Jeff Roman said its “reporting methodologies are in accordance with industry guidelines.”
CIBC’s filing, for the first quarter that ended in January, is the only one to provide increased transparency on the impact of higher interest rates on its variable-rate portfolio. The same filing said that in the fourth quarter, $39-billion worth of mortgages were negatively amortizing. That grew to $52-billion in the first quarter, said the footnote in the filing. Last summer, the bank said its borrowers were not yet putting unpaid interest onto the principal.
“Higher mortgage rates have resulted in a greater portion of fixed-payment variable mortgages where the monthly mortgage payment does not cover interest and principal,” said Nigel D’Souza, financial services analyst with Veritas Investment Research. “The full impact of higher mortgage rates will be reflected on renewal,” he said.
Today, the Bank of Canada’s benchmark interest rate is 4.5 per cent compared with 0.25 per cent a year ago.
The most recent quarterly filings from the big banks show that a chunk of their mortgage loans have amortization periods of more than 30 years.
At BMO, the proportion of residential mortgages with amortization periods longer than 30 years reached 32.4 per cent in January. At CIBC, the percentage was 30 per cent. At TD it was 29.3 per cent and at Royal Bank of Canada, it was 25 per cent, according to their regulatory filings.
Mr. D’Souza said the payment increase or shock at the time of renewal will be higher for negatively amortizing mortgages compared with variable-rate products that do not have fixed monthly payments and have faced payment increases with every Bank of Canada interest rate hike.
Editor’s note: Editor’s note: In a previous version of this article, the headline incorrectly stated that one-fifth of CIBC mortgage holders can’t cover the interest portion of their loans. In fact, once variable-rate borrowers’ fixed mortgage payments no longer covered all of the interest owing, their mortgages were extended, resulting in larger loan balances. The headline has been corrected to reflect this.