Interest-Only Mortgages with Negative Amortization

According to the Bank of Canada, approximately 1 in 6 Canadian mortgages have hit their trigger rate in 2022, and that’s the result of rapidly rising interest rates.

Now that a lot of mortgages have hit their trigger rate, there is going to be a lot of scrambling by the big banks to try to reduce risk on their mortgage book of business. One of the risk mitigation strategies that 2 of the big banks (i.e., TD & CIBC) have taken is to allow mortgage borrowers to negatively amortize their mortgage.

Negative amortization is a weird phenomenon whereby instead of paying down your mortgage, you are actually ADDING principal to your mortgage (i.e., effectively increasing mortgage debt). Essentially, the monthly mortgage payment remains the same, but the interest owing is higher than before (due to an increase in rates). As a result, any excess amounts beyond your original monthly mortgage payment gets added to your total mortgage debt.

…sounds crazy right? Well it kind of is!

This is how the banks are mitigating the need to take properties back for foreclosure sales (which they don’t want to do) by letting you kick the can down the road (i.e., extend your amortization). However, this road ends by the time the mortgage needs to be renewed based on OSFI rules of when you have to catch up on your amortization at the point of renewal. As such, the payment shock from these higher interest rates will be inevitable.

There is a limit on how much you can negatively amortize though and that amount is 80% of the appraised value. The crazy thing is that anyone who got an insured mortgage with less than 20% down payment is being regulated by CMHC instead of OSFI. Sagen (one of the mortgage insurers) is letting borrowers extended amortization by 15 years to a maximum of 40 years!

All of this is essentially a quasi-bailout for homeowners, similar to what happened with the mortgage deferrals that we saw during the pandemic. I talk more about this topic in the PPTV episode below.

What this ultimately does for the market is that it gives distressed and panicked sellers more time to make a plan so that they can keep their property. This could lead to less distressed sellers listing their property in the Spring 2023 market. If you find yourself in a situation similar to this and are looking for the best options on what to do you can do, then be sure to book a strategy call with me.

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