Stretching mortgage amortizations could cost you more than you think

Extending mortgage amortization is a common way for lenders to offer relief to struggling consumers, but the strategy could cost homeowners more in the long run, experts say.

Extending amortizations for Canadians struggling with mortgage payments is a common way for lenders to offer some relief amid higher interest rates — but experts and regulators are warning the strategy can come with unseen costs and risks for consumers.

Canadian homeowners with variable-rate mortgages on fixed payment schedules can, instead of paying more when the Bank of Canada’s policy rate rises, instead see their amortization — the length of time over which they have to pay back the loan – extended.

In Canada, initial amortizations are capped at 25 years for insured mortgages, but can run to 30 years or more in cases where a buyer puts down at least 20 per cent for a down payment. Once a bank has the mortgage on its books, however, it can choose to extend these amortizations further on a temporary basis until the mortgage comes up for renewal.

Homeowners who have hit their trigger rate — the point at which a consumer’s payments are not sufficient to cover the interest on the loan — will fall into negative amortization, where the time to pay back the loan continues to grow. Eventually, these mortgage holders must make changes to get back on track, either with a lump sum payment, larger monthly contributions or by lengthening the amortization.

Desjardins analyst Royce Mendes estimates that more than 20 per cent of the mortgage portfolio of the big six Canadian banks had a repayment period greater than 30 years in the first quarter, up from roughly two per cent one year ago.

Extending amortizations are also open to other mortgage holders to lower their monthly payments, including those with fixed-rate mortgages coming up for renewal and considering refinancing, says Penelope Graham, director of content at rate comparator website Ratehub.ca.

“That immediate monthly payment relief is what is going to make the difference in terms of whether or not they can hang onto their mortgage in this volatile rising interest rate environment,” she says.

That strategy tends to offer near-term relief for Canadian mortgage holders who are struggling amid rapid rises in the Bank of Canada’s benchmark rate over the past year; in fact, the Financial Consumer Agency of Canada (FCAC) on Wednesday issued new guidelines to standardize the practice among federally regulated financial institutions.