Extending amortizations for Canadians struggling with mortgage payments is a common way for lenders to offer some relief amid higher
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.
“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. Ratehub recently undertook an analysis to show why keeping amortizations in check is critical for consumers.
The total interest paid on the mortgage would balloon from just under $450,000 on a 25-year amortization to nearly $1.3 million over 60 years and more than $2.1 million for a 90-year amortization, for example.Extending amortizations far past their original timeframe and driving down monthly payments, only for consumers to face a jarring jump in payments when they renew their mortgages, shows the risks of an over-reliance on extending amortizations, Graham says.
OSFI told Reuters in June that it has urged banks to tackle the risks from amortization extensions and resolve negative amortization at the “earliest opportunity.”To that end, Graham warns that consumers hoping for a boost to the allowable amortizations might be disappointed.Increasing the maximum allowable amortization in Canada might help more consumers jump into the housing market amid more manageable monthly payments, Graham says.