Bank regulator OSFI estimates there’s about $250 billion worth of home loans currently stretched out for 35 years or more, which are most likely loans that have either dipped into negative amortization already, or soon will. (Chris Ratcliffe/Bloomberg)
2741
comments
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 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 will unveil 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 are now negatively amortizing, which happens when 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 owe less and less money over time.
It happened to Michael Girard-Courty. He bought a duplex in Joliette, Que., last year on 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 allocated toward interest — not toward paying down the loan at the pace he’d planned.
Rate hikes gobble up every penny of household spending
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 of my mortgage and the rest is all in interest,” he told CBC News in an interview. “And my 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.”
Michael Girard-Courty bought a duplex in Joliette, Que., last year. In less than a year, his mortgage has ballooned from 25 years to 47. (Emiliano Bazan/CBC)
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 negative amortized loans make up a large and growing pile of debt. Roughly one fifth of the mortgages on the books at BMO, TD and CIBC were 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 likely on the way.
Mortgage broker Patrick Betu thinks rules that allow for so many negative amortization loans need to be updated. (Philippe de Montigny/CBC)
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 amortizing loans, 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 so we 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 requiring borrowers 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.)
Betu is among those who thinks variable rate loans with fixed payments that lead to negative amortizations shouldn’t be allowed at all, and he hopes the new rules will crack down on them.
At a recent news conference, the head of the Office 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.”
Interest rates pushed his mortgage from 25 to 47 years
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.”
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
