The Blubber

Some homeowners are facing extremely long amortization periods due to high interest rates. While the standard time to pay off a mortgage is 25 years, existing homeowners with 'fixed-payment' variable-rate mortgages are seeing their amortization periods extend to as much as 90 years. This happens because these mortgages automatically adjust to rising interest rates while the monthly payment remains the same. Mortgage brokers have noticed cases of 60-year, 70-year, and even 90-year amortization periods, causing concerns among homeowners.

There are two types of variable rate mortgages: variable-rate fixed-payment mortgages and adjustable-rate mortgages. Homeowners with variable-rate fixed-payment mortgages are in a riskier position during high-interest-rate periods. A greater portion of their monthly payment goes toward interest instead of the principal, and this situation persists for a longer period of time. This means homeowners are paying less principal and accumulating more debt. Even if they prefer having a consistent mortgage payment, the automatic adjustment of the amortization period becomes problematic.

It is worth mentioning that major banks do not initially offer 90-year mortgages to homebuyers. The elongated amortization period only applies to existing variable-rate fixed-payment mortgages. The banks do not deliberately extend the amortizations; it is a feature of the product that changes automatically within their system.

Once a homeowner's mortgage payment is entirely allocated to interest and not the principal, they have hit their trigger rate. At this point, the lender notifies them that their monthly mortgage payments need to be adjusted. Homeowners can choose to increase their mortgage payment to pay more of the principal, make a lump sum payment of 10% to 20% of the original principal balance, or switch to a fixed-rate mortgage. This adjustment may lead to a significant jump in the mortgage payment or require a lump sum payment to reduce the amortization period. Generally, it is unlikely that the amortization can be further extended unless there are exceptional circumstances.

Recently, these extended amortization periods have drawn attention from Canada's banking industry regulator, the Office of the Superintendent of Financial Institutions (OSFI). In its annual risk assessment report, the OSFI identified housing as the top risk and expressed concerns about variable-rate fixed-payment mortgages with extended amortizations. The regulator is actively assessing the risks associated with these mortgages to determine if revisions are necessary. Extended amortizations pose increased risks, such as a longer persistence of outstanding loan balances and greater potential losses for lenders. The OSFI expects federally-regulated lenders to address and mitigate these risks proactively, emphasizing that extended amortizations are not a long-term solution and should be reduced at the earliest opportunity.