BMO reduces exposure to ultra-long mortgages

Strategic move had allowed borrowers to extend loan repayment periods

BMO reduces exposure to ultra-long mortgages

In response to the sharp increase in interest rates during 2022 and 2023, the Bank of Montreal (BMO) has taken steps to decrease its exposure to ultra-long mortgages within its Canadian customer base. This strategic move allowed borrowers to extend their loan repayment periods, offering some relief from the rising monthly payment burdens.

Initially, the surge in borrowing costs prompted BMO to adjust its mortgage terms, leading to nearly a third of its domestic mortgage portfolio being stretched out to amortization periods beyond 30 years. However, recent financial disclosures for the quarter ending January 31 indicate that this figure has now been reduced to approximately 25%.

As the Bank of Canada pushed its benchmark interest rate up to 5%, major Canadian banks have been exploring various strategies to mitigate the financial strain on mortgage holders. This situation has particularly impacted homeowners with variable-rate mortgages, many of whom have reached their "trigger rates”—a point where their monthly payments only suffice to cover the interest on their loans.

Under these circumstances, clients have the option to either shorten their amortization period by increasing their monthly payments or by making a substantial lump-sum payment.

Read next: Rate uncertainty looms over Canada’s big banks ahead of earnings

BMO is not alone in facing this challenge. Other leading Canadian banks, including RBC, TD, and CIBC have also reported significant portions of their mortgage clientele extending their amortization periods well beyond the traditional 25 years.

This trend has caught the attention of Canada's banking regulator, which has voiced concerns over the practice and has been actively encouraging lenders to address and reduce this issue.

This week, Canada’s six largest banks are set to report their earnings for the fiscal first quarter, providing more insight into how each institution is navigating the complexities of the current economic landscape.

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