Struggling variable-rate borrowers may have to make higher payments on renewal
One in five borrowers who have taken out a mortgage with CIBC may face larger outstanding loan balances as homeowners struggle to keep up with rising interest rates.
New data from CIBC shows that 20% of the bank’s mortgage holders have monthly payments that can no longer cover even the interest portion of their loans. This number represents $52 billion worth of mortgages out of CIBC’s $263 billion residential loan portfolio.
The data, included as a footnote in CIBC’s latest quarterly financial statements, is the first from a major bank to reveal the amount of variable-rate mortgages where payments no longer cover interest costs.
This comes after the Bank of Canada hiked the benchmark interest rate from near zero to 4.5% in less than a year.
CIBC has, in some cases, extended mortgage amortizations — or the time it takes to repay the loan — for affected borrowers. The bank also allows borrowers to go past the trigger rate and stick with payments that do not cover the full amount of the interest owed, up to a certain threshold. This is also known as negative or reverse amortization, which happens when mortgage payments are not sufficient to cover the interest due. Borrowers will then add unpaid interest on to their original loan or principal.
Experts warn that the move may have longer-term consequences as it raises the total loan balance and could leave homeowners with negative amortizations unable to make higher payments at renewal.
“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, as cited by The Globe and Mail. “The full impact of higher mortgage rates will be reflected on renewal.”
The paper also quoted Mike Rizvanovic, financial services analyst with investment bank KBW as saying that “it’s absolutely a sign of stress to come. It’s just the stress isn’t here yet.”
Despite an increase in extended amortization periods for its fixed-payment variable-rate mortgages, CIBC maintains that the quality of its portfolio remains strong.
“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, the bank’s chief risk officer, said. “We actively monitor our portfolios and proactively reach out to clients who are at higher risk of financial stress.”
In its latest filing, CIBC also revealed that $39 billion worth of mortgages were negatively amortizing in the fourth quarter of 2022 before growing to $52 billion in the first quarter of 2023.