A 47-year mortgage? They’re out there — and even longer ones could be

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.

But because of the large and rapid run-up in interest rates in the last year and a half, that balance has been thrown out of whack.

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.

As things stand now, “only $23 goes to pay the capital of 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.”

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.