As Canadians continue to deal with higher borrowing costs, one mortgage expert said some homeowners have been extending their amortization periods to more than double the typical 25 years.
Victor Tran, mortgage and real estate expert at Ratesdotca, said in an interview with BNN Bloomberg Thursday that since the Bank of Canada began raising interest rates in March of 2022, some of his clients have drastically extended the amortization for their mortgages.
“I’ve had many clients with amortizations, that are 70, 80, even 90 years remaining, in the extreme cases, and that's simply because their payments are not going towards any principle at all,” he said.
“It's mainly because the payments are strictly just paying interest to the bank, they're not paying down any of the principal payment at all.”
According to the Financial Consumer Agency of Canada, longer amortization periods will result in lower payments, however, when a homeowner takes longer to pay off their mortgage, they will pay more in interest.
Tran said mortgage owners can reduce their amortization period by choosing to pay extra toward their principal balance. However, those electing to just pay the interest on their mortgage are basically “just paying rent to the bank,” he said.
The maximum amortization period that is available from an A-lender is 30 years, according to Tran. However, he said that due to the rising interest rate environment, “amortizations have been extended automatically by the lenders.”
Canada’s A-lenders include major banks, which are federally regulated; meaning those applying for a mortgage will be subject to the stress test, according to LowestRates.ca.
For the past year or so, Tran said homeowners have been able to stay in their homes while paying only the interest on their mortgage and avoiding the impacts of higher payments. However, he said this is only a temporary solution.
“It will be a huge shock to homeowners and they should prepare for this. Sooner or later, the lenders will need to start forcing these customers to pay down the principal balance,” he said.
Tran said he thinks the Office of the Superintendent of Financial Institutions (OSFI) will make changes requiring lenders to compel mortgage holders to make payments toward the principal of their loan, not just the interest.
“It has been about a year now, I think it could have been done earlier. But sooner or later, I think new rules will be implemented,” he said.
“Otherwise, we may have generational mortgages where these mortgages can be passed on to their kids, if the amortization stays at elevated levels at 70, 80, or even 90 years. So something has to happen.”