The Blubber

There's approximately $250 billion worth of mortgages in Canada that are currently amortized for 35 years or longer, per CBC.

That's 12% of all mortgages.

Three prominent Canadian banks have disclosed that approximately 20% of their residential mortgage borrowers, representing nearly $130 billion in loans, are experiencing a situation where their outstanding balances are increasing because their monthly payments no longer cover the full interest owed.

This phenomenon, known as negative amortization, has been triggered by the significant uptick in interest rates, as revealed in the financial reports of the Bank of Montreal (BMO), Toronto-Dominion Bank (TD), and Canadian Imperial Bank of Commerce (CIBC). It serves as a clear indicator of the consequences stemming from the rising interest rate environment and the potential financial strain placed on borrowers, who are now required to increase their monthly payments to realign with their mortgage repayment goals.

In the third quarter ending July 31, BMO disclosed that mortgages worth $32.8 billion were experiencing negative amortization. This figure represents approximately 22% of the bank's Canadian residential loan portfolio. In the previous quarter ending April 30, the negative amortization amount was $28.4 billion, equivalent to 20% of BMO's loan portfolio.

TD reported that in the third quarter, mortgages worth $45.7 billion were facing negative amortization, accounting for approximately 18% of its Canadian residential loan portfolio. This figure was higher than the $39.6 billion, or 16% of its loan portfolio, in the fourth quarter of the previous year.

It is noteworthy that this marks the first time BMO and TD have provided detailed information on loans experiencing negative amortization. Previously, they had not disclosed this information to shareholders, suggesting it was not considered significant. When questioned about the change in disclosure, BMO spokesperson Jeff Roman cited compliance with international accounting standards and regulatory requirements as the reason for the update. TD spokesperson Samantha Grant did not provide an explanation.

CIBC began reporting negatively amortizing loans in the fiscal fourth quarter of the previous year. In the third quarter of this year, CIBC reported mortgages worth $49.8 billion, equivalent to 19% of its Canadian residential loan portfolio, facing negative amortization. This figure was higher than the $44.2 billion, or 17% of its portfolio, in the second quarter, according to the bank's financial results.

Typically, mortgages are structured so that borrowers gradually reduce the loan balance over time. However, due to the design of most variable-rate mortgage products in Canada, loan balances have expanded alongside rising interest rates.

BMO, TD, and CIBC offer variable-rate mortgages with fixed monthly payments. In these fixed-payment loans, any increase in interest rates reduces the portion allocated to the principal, consequently extending the loan's amortization period as it takes longer to pay off the debt.