A 47-year mortgage? They're out there and even longer ones could be coming

Canada's top banking regulator will soon implement new guidelines for the mortgage market, aimed at reducing the risks posed bynegative amortization mortgages home loans where the payment terms have ballooned by years and sometimes decades because payments are no longer enough to pay down the loan on the original terms.

This month, the Office of the Superintendent of Financial Institutions willunveil new capital adequacy guidelines for banks and mortgage insurers. Among the expected changes will be some aimed at reining in a surge of negative amortized loans.

About one out of every five home loans at three big Canadian banks arenow negatively amortizing, which happenswhen years get added to the payment term of the original loan because the monthly payments are no longer enough to cover anything but the interest.

On a standard 25-year home loan, under normal circumstances, a certain percentage of the mortgage payment goes to the bank in the form of interest, while another chunk is allocated toward paying down the principal. That way, as the borrower makes their payments,they oweless and less money over time.

But because of the large and rapid run-up in interest rates in the last year and a half, that balance has been thrown out of whack.

It happened toMichael Girard-Courty. He bought a duplex in Joliette, Que., last yearon a 25-year, variable rate loan. The monthly payment was well within his budget, at $1,156. But since he signed on the dotted line, the Bank of Canada has hiked interest rates multiple times, which means that more and more of his payment is allocatedtoward interestnottoward paying down the loan at the pace he'dplanned.

WATCH | Homeowner regrets decision to go variable:

Rate hikes gobble up every penny of household spending

2 years ago

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Rabia Shumayal of Mississauga, Ont. has seen her mortgage rate go from 1.9% to above 5% this year, which has forced her to cut out basically all other spending for her family.

As things stand now, "only $23 goes to pay the capital ofmy mortgage and the rest is all in interest," he told CBC News in an interview. "Andmy mortgage went from 25 years to 47."

While he hopes to be able to change that, either through lower rates or higher payment amounts, the investment he bought in the hopes of accelerating his retirement has quickly turned into a liability that's on track to stick around for longer than he'd planned to work.

"It's not a fun situation and I never expected to be in it," he said. "I don't know how it's going to end up."

He's not the only one in this predicament. Exact numbers are hard to come by, but regulatory filings from Canada's biggest banks show negativeamortized loans make up a large and growing pile of debt.Roughly one fifth of the mortgages on the books at BMO, TD and CIBCwere in negative amortization territory last quarter.

That's almost $130 billion of housing debt where, instead of a standard 25-year loan, the mortgage is stretched out over 35, 40 or more years. And with roughly 100,000 mortgages coming up for renewal in Canada every month, more are likelyon the way.

Patrick Betu, a mortgage broker in Ottawa, says it's an "alarming situation" and one that needs to be addressed.

Betu says none of his clients have negatively amortizingloans,in large part because he's been recommending short-term, fixed rate loans to ride out the current volatility.

"Obviously we do not have a crystal ball sowe can't really say whether or not mortgage rates will come down anytime soon, but that's basically the situation with my clients," he said.

Some lenders limit the possibility of negative amortizations by either requiringborrowers to come up with lump sum payments when their payment mix nears the limit, or switching them to a fixed rate loan with higher but steady payments.

Two other big Canadian banks, Royal Bank and Scotiabank, do exactly that, which is why they're in a different situation.

"We do not originate mortgage products with a structure that would result in negative amortization, as payments on variable rate mortgages automatically increase to ensure accrued interest is covered," RBC said in its most recent report to shareholders.

(Despite that, almost a quarter of the mortgages on the books at RBC are amortized for more than 35 years. At TD it's 22 per cent, at BMO it's 18 and at CIBC it's 19, while at Scotiabank, less than 1 per cent of the banks' Canadian home loan book is for longer than 35 years,Scotia recently revealed.)

Betuis among those who thinks variable rate loans with fixed payments that lead tonegative amortizations shouldn't be allowed at all, and he hopes thenew rules will crack down on them.

At a recent news conference, the head of theOffice of the Superintendent of Financial Institutions,Peter Routledge,poured cold water on the notion that any sort of"crackdown" was coming,but said the forthcoming guidelines are aimed at reducing the risk these loans present to the financial system in the aggregate.

"The risk concentration is not high enough to give us severe concerns ... but if you [asked] me five years ago if I would want a problem this size, no." he said. "I think both banks, financial institutions and borrowers would be better off if the prevalence of this product was less."

WATCH | High interest rates push homeowners into longer debt:

Interest rates pushed his mortgage from 25 to 47 years

12 months ago

Duration 2:09

About one in five variable rate mortgage holders at three major banks are now in 'negative amortization' where the time it takes to pay off the home loan is getting longer. It's causing concern with regulators who plan to reign in the type of loan that allows it. One man saw his repayment period go from 25 to 47 years.

Routledge says there's approximately $250 billion worth of mortgages in Canada that are currently amortized for 35 years or longer, which is a decent proxy for a loan that's either already longer than originally planned, or will be soon.

That's about 12 per cent of Canada's total mortgage debt of just over $2.1 trillion "not small, not huge either [but] manageable," Routledge said.

But he did acknowledge it's a problem, and the guidelines to be published this month "will begin to discuss how we might address that and how we might put in place a little bit more regulatory oversight to make this product a little bit less prevalent."