credit and debt
NOT KEEPING UP WITH OUR DEBTS
Variable-rate borrowers at some Canadian financial institutions maintain fixed payments even as their monthly interest costs balloon— with implications for those borrowers and the broader market.
One product offered by some Canadian banks is a variable-rate mortgage with a fixed payment option that is not subject to a trigger rate, meaning that when interest rates change the payment stays the same, but the amount of that payment that gets dedicated to interest changes. In other words, if a variable mortgage rate increases to the point where the borrower's payment no longer covers the interest owed, the lender—keeping the borrower's payment constant—will add the unpaid interest back into the borrower's principal (the mortgage balance). These mortgages now have an infinite amortization, with the balance of the loan increasing up
until the time the current mortgage contract comes up for renewal. One Canadian chartered bank currently carries $52 billion in variable-rate mortgages that have fixed payments that are not covering interest costs—equal to more than 70% of that bank's variable-rate mortgage book. By not increasing their payments today, these borrowers are kicking the can down the road to when their terms expire, at which point they will be faced with either increased payments, a need to sell assets or take on additional debt to pay down their principal— or the worst-case scenario sell their home.
TO INFINITY (AMORTIZATION) AND BEYOND
60%
53%
50%
of variable-rate mortgage payments are interest only 72%
40%
35%
31%
30%
27%
20%
17%
13%
10%
10%
5%
3%
3%
1% 1%
1%
0%
>35
0-5
>5-10
>10-15
>15-20
>20-25
>25-30
>30-35
AMORTIZATION PERIOD YEARS
CONTRACTUAL PAYMENT BASIS
CURRENT CUSTOMER PAYMENT BASIS
DATA: AMORTIZATION PROFILE OF CANADIAN RESIDENTIAL MORTGAGES
SOURCE: CIBC REPORT TO SHAREHOLDERS, Q1 2023
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