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)
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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.”
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
