CityNews Update | New Guidelines For The Mortgage Market | October 5, 2023

Clinton joins Todd Vienotte on CityNews to discuss a recent news story about new mortgage guidelines for amortizations. Todd and Clintonn talk about variable and static payments, the concern around renewals, and the impact of rising mortgage rates on homeowners.

Todd Veinotte 00:00
I saw this story on the CBC website this morning, Canada’s top banking regulator will soon implement new guidelines for the mortgage market aimed at reducing the risks posed by negative amortization mortgages, home loans, where the payment terms have ballooned by years, sometimes decades, because payments are no longer enough to pay down the loan on the original terms. Joining us for a chat about all of this is our mortgage guru Clinton Wilkins. Clinton, thanks for joining the show as always.

Clinton Wilkins 00:49
Thanks for having me, Todd.

Todd Veinotte 00:50
Alright so kind of explain if you can, as best you can, what’s going on here.

Variable and static payments in Canada

Clinton Wilkins 00:58
There’s two types of variable rate mortgages Todd. There’s ones that have an adjustable payment, where the payment goes up and down when the primary changes. I think those types of mortgages are certainly more popular. A lot of broker lenders, and some of our bank lenders work their mortgages like that. So it basically prepares the borrower, as the interest rates go up with a higher payment, and also they benefit of having a lower payment when the rates go down. But it protects their amortization, their amortization stays in line. Now, many of the big banks have a static payment. So what happens is when the prime rate has increased, it increases the amortization. And my personal mortgage is like that, so I’ll share that obviously, with our listeners. Some lenders have a static payment. So when the amortization or when the prime rate goes up, the amortization gets longer. So with my personal mortgage, I originally started at approximately 25 year amortization, through payment increases, and obviously making my regular payments, my amortization went down to 18 years. That was basically when the rates were at the bottom. Now, as the rates have increased, my amortization is up now, over 40 years, there certainly are some borrowers that we see here in the office that have amortizations, that are basically negative. There are some lenders that allow the amortization to get so long, and the payment not to adjust that the actual payment that the borrowers are making, is not even covering the interest. So every month goes by, they technically owe more on the mortgage. Now, obviously, those types of mortgages are not as popular. Canadians, I think, by and large, want to pay down their mortgages. And we’ve not really been in a situation where so many borrowers got mortgages at such low rates, and now obviously, have increased. So it’s something the federal government certainly has their eye on.

“When these mortgages come up for renewal, it is going to be a huge shock to borrowers”

Clinton Wilkins 02:47
You know, they’re working on legislation that’s going to force these bank lenders to not allow borrowers to the amortization go longer than 40 years. So if you have a mortgage that basically is a negative amortization, so that basically means that your mortgage is getting bigger. Or if you have a mortgage, that that is 47 years, or 50 years, or 80 years or 100 years, it is going to force that bank to bring the amortization down to 40 years, and then obviously, a borrower’s payment is going to increase. My big concern, as a mortgage broker, and I deal with clients every single day, is when these mortgages come up for renewal, it is going to be a huge, huge shock to borrowers, you know, to borrow at these current rates, because obviously, their payment is going to reset, and their amortization is going to reset, the lender is going to want to bring the amortization back in line when the mortgage comes up for renewal. So, and I think it doesn’t prepare the borrower for the future. You know, we have all of these mortgages that are going to come up for renewal and 1, 2, 3 years, and there’s going to be a huge surge in people’s payments. Like we’re seeing that right now, Todd, even with borrowers that were previously in a fixed rate, they’re coming up for renewal and renewing at rates that are double or triple what they had.

Current amortization rules

Todd Veinotte 04:02
Wow, wow. Well, okay, so I, I was under the impression and certainly correct me if I’m wrong, that there were rules which restricted amortization to, I thought it was 30 years, but so is that on on the initial signing, or give me some clarity on this.

Clinton Wilkins 04:23
The rules have changed over the years, but on a conventional mortgage today, most lenders will allow up to a 30 year amortization for a new mortgage. The challenge is if you get one of these variable rate mortgages that has a static payment, if you sign up for that mortgage today with a 30 year amortization, and the rates increase tomorrow, your amortization automatically is getting longer. These borrowers what should have happened is they should have increased their mortgage payments as the rates increased. That’s what I did myself, and I did a lump sum payment and I’ve done payment increases and I brought my amortization down, it’s still not where I want it to be, I’d love to have my mortgage paid off in the 18, 17, 16 years that I thought it was going to be paid off. And I’m still optimistic that that will happen. But these borrowers basically have set their payment, and basically set it and forget it. The challenge is, with every increase their amortization has gotten longer and longer. You know, really, these borrowers need to get some advice, because when the mortgage comes up for renewal, there certainly is going to be a shock. And in some cases, we’re seeing borrowers right now that are needing to do a refinance, to extend their amortization. So the mortgage is coming up for renewal. They had a mortgage that the amortization became, like 100 years, when it came up for renewal, the lender then wants to bring it back in line at that 25, 20 years, wherever their amortization should be. And in some cases, obviously, their payment would be going up drastically. So they’re choosing to do a longer amortization, to try to bring the payment back into a more reasonable situation, especially while the rates are high.

Todd Veinotte 06:05
Alright, so how concerning is this? I mean, we hear a lot of people try and draw parallels to what happened in the United States during the housing crisis. And there and I think that there’s a lot of kind of hyperbole on that there. There are a lot of parallels that aren’t there that should be there. One, of course, is the quality of the lenders themselves. And our banking industry is much more regulated and much more robust than what it was in the United States in 2008. So for those who are listening to this, and they’re and they’re saying, Oh, here we go 2008. What do you say to those people?

Rising mortgage rates and the impact on homeowners

Clinton Wilkins 06:47
Our banks are very, very strong in comparison to the 2008 situation in the US. The challenge is that these lenders that we’re talking about are not credit unions. They’re not broker lenders, they’re not trust companies. The banks that we’re talking about that are CIBC, and TD Bank, and Bank of Montreal, these are the lenders that have these types of mortgages. So, you know, we’re talking about very, very stable financial institutions. There certainly has been brought up a lot of news around the CIBC, specifically, and the percentage of mortgages that they have, that are in this type of situation. And, you know, I think all lenders are very cognizant, as the rates have gone up, and we’re talking rates gone up, we’re not just talking about variable rates, Todd, we’re talking also about fixed rates, as the rates have gone up. All of these lenders are very cognizant around delinquency, are the payments happening on time? And how many mortgages do they have on the bulk, that have this style of setup, where the amortization has gotten longer, and in some cases, the amortization is negative. You know, it does bring some risk, and the federal government is, you know, very worried about it. You know, they want to ensure that our housing market is stable. As you know, over the last three or four years here in Halifax, we’ve been in increasing, you know, value environment. The demand has been higher than the amount of supply. It’s not like that, across the country. They’re certainly markets that are already suffering due to, you know, lack of demand, and it certainly has negatively impacted the housing market in Ontario and BC specifically.

Todd Veinotte 08:31
Alright, so this is how, I guess concerned should the average Canadian be over this story, then?

Clinton Wilkins 08:40
I think that there is a level of concern. But I think if you are a homeowner, and you have any style of mortgage, I think you do need to be concerned because when your mortgage comes up for renewal, your rates today will be higher than the rate that you’re coming out of. I’ve been doing this for 17 years. But in 17 years, we’ve not been in a raising rate environment like we are now. Even this week, Todd, we saw many lenders increase their fixed rates, 20 basis points or more just due to what’s going on in the bond market. So I think we were just so focused on talking about the Bank of Canada increasing the key overnight rate, which has increased bank prime, you know, the last 18 months, we forgot about the elephant that’s in the room, these very low fixed rates that are coming up for renewal. And I think now this is more of the concern. And yes, I don’t want to, you know, shadow, the concern of these variable rate mortgages, this is a concern, but they’ll come up for renewal, they’ll renew, some people are going to sell their home Todd, because they can’t afford it. Some people will refinance to extend their amortization. And some people are just going to grin and bear it, but that is going to impact their household spending. And in some cases, this is really what the Bank of Canada wants and what the federal government wants. They want Canadians to stop spending and they want the economy basically to be ground down to a recession type situation.

Todd Veinotte 10:06
Okay, and like always people if they if they need to seek out advice, right? You’d say this constantly. But it’s true that don’t, don’t be in denial. Don’t be naive.

Clinton Wilkins 10:20
Talk to your lender early Todd, I think that’s the key. If you have a variable rate mortgage and your amortization is gotten longer and longer, talk to your lender about what the options are. You might be able to refinance or convert into a fixed rate or increase your mortgage payment to bring the amortization back in line. I think you just really need to be aware of your situation right now. And that’s every homeowner. Know when your renewal is and start looking at what your options are around renewal at least 120 days prior to the renewal date. You know, we get so many calls from consumers every day, that their mortgage renewing this month, and although we’d love to help, more time is better, especially in a rising rate environment. Like if we talk to people three or four months ago, we wouldn’t be able to secure a much lower rate at that point.

Todd Veinotte 11:10
Okay, Clinton, always great. Appreciate it and we’ll talk real soon.

Clinton Wilkins 11:14
Thanks for having me, Todd.

Todd Veinotte 11:15
All right. Take care. You as well, Clinton Wilkins, our mortgage guru.