Mortgage stress looms over Canada’s big banks. What they — and consumers — can do

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Canadian consumers are facing mounting financial pressure amid higher interest rates, and it’s something Canada’s biggest lenders are bracing for. But there are steps that borrowers — and the banks themselves — can take to soften the blow.

The latest bank earnings showed risks of a slowing economy are weighing on the country’s largest financial institutions, many of which reported dips in profit and higher provisions for possible loan losses in their third quarters.

Some of these banks say they’re “comfortable” with risk levels on their mortgage books even as “pressure” mounts on consumers in a rising interest rate environment.

Royal Bank of Canada CEO Dave McKay told analysts last week after announcing job cuts at the bank that the impact of higher interest rates and external factors like a slowdown in China will serve to cool Canada’s economy.

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“We are seeing evidence of slowing labour markets as evidenced by slowing wage growth, lower job postings and an increase in Canadian unemployment. Consequently, our base case forecasts a softer economic outlook,” he said during the bank’s third-quarter earnings call.

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CIBC Q3 profits down 10% compared to 2022

Scotiabank CEO Scott Thomson told analysts that the bank was putting aside more funds for loans that could go sour — a move mirrored by the other Big Six banks this week — amid signs of “recessionary conditions” in the economy.

While many economists have been forecasting a slowdown in the economy this fall as Canadians face higher debt costs and gird themselves against possible job losses or hits to income, consumer spending has been surprisingly strong for much of 2023.

TD Bank’s latest consumer spending tracker released Wednesday shows that while spending on discretionary goods is indeed falling off, still-strong demand for services such as travel and entertainment are proving a “catalyst” for continued activity.

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“The higher interest rate would put pressure on the consumer. But we’re seeing so far they continue to be resilient… but we’re continuously monitoring very closely,” TD CFO Kelvin Tran said in an interview with Reuters this week.

The books of some of the Big Six banks, meanwhile, show the toll of higher interest rates is still looming for many Canadians.

While the Bank of Canada has rapidly raised its benchmark interest rate by 4.75 percentage points over the past 20 months, some households with mortgages still coming up for renewal have yet to feel the brunt of the higher cost of borrowing.

Pedro Antunes, chief economist at the Conference Board of Canada, told Global News this week that only a third or so of outstanding mortgages have already renewed into the higher rate environment, with “a lot of pain yet to come.”

What banks’ mortgage books show

Among those Canadians staring down the barrel of higher rates are those with variable-rate mortgages on fixed payment schedules. While all variable mortgages see their interest rates rise and fall in step with the Bank of Canada’s policy rate decisions, those with static payments see their amortizations stretch or compress instead as they pay down more or less interest on the principal loan.

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This can continue until a consumer’s monthly payments only cover off interest and they hit the “trigger rate” on their mortgage, at which point a consumer might be forced to make higher regular or lump-sum payments or lock into a fixed-rate product.

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RBC, TD Bank, CIBC and BMO’s third-quarter earnings all show that more than 40 per cent of their current mortgage books hold amortizations past the typical 25-year mark. When these mortgages come up for renewal, many consumers could be forced to snap back to their original amortization period at today’s rates, which can mean much higher payments.

Variable-rate, fixed-payment mortgages were popular during the COVID-19 pandemic when low interest rates helped many Canadians jump into the housing market. Scotiabank and National Bank of Canada do not offer these kinds of variable products to their mortgage customers.

An RBC spokesperson told Global News this week that some of its clients “may be vulnerable to the unprecedented higher rate environment, particularly at renewal,” and the bank will support clients with their “unique needs.”

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Among its peers, TD Bank had the highest proportion of mortgages with amortizations over 25 years in the second quarter of the year at 48 per cent. A spokesperson for TD told Global News on Wednesday that the percentage of mortgages on the lender’s book with amortizations beyond 35 years has gone down quarter-to-quarter as clients lock in fixed-rate products or increase their payments.

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The spokesperson added that in the “rare instances where help is needed,” TD Bank is supporting customers with a “robust renewal strategy” that includes reaching out to clients before hitting their trigger rates, though they did not say what specific relief is offered.

The Financial Consumer Agency of Canada in July released new guidelines for federally regulated financial institutions to help ease the burden of mortgage renewals on vulnerable customers. That included extending mortgage amortizations for as short a period of time as possible, and waiving some fees and penalties in the renewal process.

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The RBC spokesperson said it supports the FCAC directives and “already (has) many practices in place” to help clients, including proactive communications around renewals.

TD, meanwhile, said that its customer base “remains strong” and the bank is “comfortable with the credit quality” of its loan book.

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Global News reached out to CIBC for comment on how the bank is handling customers with stretched amortizations and were pointed to comments made by the company’s chief risk officer during its earnings call on Thursday morning.

Frank Guse said that CIBC’s proactive outreach has seen around 8,000 clients increase monthly payments and just over 1,000 customers make lump-sum payments to get out of negative amortization status.

He added that overall late-stage mortgage delinquencies “remain low” when compared to pre-pandemic levels, and that the variable-rate products making up a third of CIBC’s total mortgage book “continue to display strong credit quality and performance.”

Global News reached out to BMO for comment as well but did not receive a response.

What should you do ahead of renewal?

Mortgage broker and expert Leah Zlatkin tells Global News that there’s a lot of “uncertainty” in the mortgage space right now as clients approach renewals and the Bank of Canada’s interest rate hike cycle remains active.

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The central bank’s next policy rate decision comes on Sept. 6, with some economists believing another increase is in the cards amid stubborn inflation.

Regardless of where the Bank of Canada’s rates are going, Zlatkin says the first step for any homeowner with a mortgage term coming up is to reach out to your current lender and get a quote for the rate they’ll be offering at renewal, preferably at least six months in advance.

“Once you get the renewal offer from your lender, reach out to a mortgage professional and make an educated decision about whether you can get a better rate somewhere else … or whether this is, in fact, the best renewal offer you can get — and then sign that paperwork,” Zlatkin says.

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She cautions that some homeowners who got a very low mortgage rate in recent years might be stuck when it comes to changing lenders in today’s higher rate environment. A homeowner might not be able to qualify at a new lender under today’s rates, she warns.

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In these instances, Zlatkin says your existing lender could be the only place to turn at renewal. That could see consumers offered unfavourable rates because the lender knows there’s little threat from competition elsewhere in the marketplace, she says.

“That’s where I think it becomes really disadvantageous for consumers because you can be put between a rock and a hard place.”

If an individual is in that situation, Zlatkin recommends only committing to a renewed mortgage for two or three years to minimize the pain and hopefully build up your financial standing to qualify at a different lender at the end of that term.

The caveat here, she notes, is that five-year terms are typically the lowest rates consumers will find in the market today, which could help a homeowner qualify for a mortgage with another lender.

“Go with whatever term you need to weather out the storm and then move on to something different,” Zlatkin says.

— with files from Reuters

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