Canadian banks’ flexibility is putting a floor under home prices - BNN Bloomberg

Some consumers with variable-rate mortgages at Canada’s biggest banks are tacking unpaid interest onto their mortgage’s principal instead of paying the full amount each month. Others are paying interest only.

So far, the flexibility is paying off. Canadian home prices have slumped nearly 16 per cent and borrowing costs have nearly doubled. But mortgages in arrears, or those loans that are behind on payments by three months or more, are still only 0.16 per cent of total loans outstanding as of the end of January, according to data from the Canadian Bankers Association.

But the longer it takes for that to happen, the higher the chance for complications. Borrowers could start to face a heavier financial burden each month as new payments are calculated based on a principal amount that’s increased. Banks, already rattled by the financial turmoil in the U.S. and Europe, could face higher costs themselves as mortgage books get riskier.

While Royal Bank of Canada doesn’t allow negative amortization, the lender does let variable-rate borrowers stop paying down their principal each month and extend amortization periods to more than 30 years. About $75 billion worth of mortgages, or 20 per cent of RBC’s total domestic residential loan book, are now paying interest only, according to a spokesperson.

CIBC does not let the principal on these loans swell to more than 105 per cent of the original amount, according to a spokesperson. At that point, consumers just have to increase payments or get the principal down. The big question for many of these borrowers will be what happens when their mortgage faces renewal. That’s when the amortization typically reverts to where it started, demanding the higher monthly payments that would go along with a tighter timeline. Because mortgage terms in Canada are typically five years, nearly 20 per cent of mortgages — fixed and variable — are up for renewal this year, according to Capital Economics.

When banks start using the same credit card tactics for mortgages to manage, not help, people from falling behind, we have a problem. The 'we'll keep you in debt forever' HELOC scheme wasn't enough for them. Banks prioritize risk management, not people.

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