Homeowners are forced to sell their homes as negative amortizations decline
Fewer homeowners are financing negatively amortizing mortgages, but that doesn’t mean financial relief is on the horizon for Canadians falling deeper in debt, experts say.
Outstanding loans in negative amortization have declined in the latest quarter, but are still around $110 billion among the three banks that allow them, according to last week’s bank earnings releases. That’s down from $128 billion in the third quarter.
Negative amortizations — sparked by interest rate hikes starting in the spring of 2022 — occur when a borrower is unable to cover the interest portion of their mortgage each month, resulting in a growing mortgage balance.
TD reported $37.4 billion in negative amortizations in its fourth quarter with CIBC at $43 billion, and BMO reporting $30 billion. Scotiabank and RBC do not allow negative amortizations.
The reason behind the decline is that negative amortizations were never meant to be a permanent solution to the credit crunch, experts say. As a wave of mortgages comes up for renewal in the next three years, homeowners will increasingly be forced to choose between selling or raising monthly payments.
“These negative amortization mortgages will be gone by the end of 2026,” said mortgage broker Ron Butler.
He said he’s seen borrowers find a “financial motivation” to sell in markets where overall housing prices are declining. Others are switching to fixed-rate mortgages or making lump-sum payments.
‘It’s time to unwind higher rates’
“The future of mortgages, for the next couple of years, is that more people will make higher payments,” he said.
The Bank of Canada’s next moves could also contribute to the disappearance of negative amortizations. Just as quickly raising rates led to negative amortizations, a sharp rate cut would allow variable mortgages to amortize again.
“It’s time to move rapidly to unwind higher rates,” said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives.
“We haven’t tanked the economy yet. It’s been dead flat … but we have to act quickly because the lags take a long time,” he said. “If negative amortization starts to translate effectively into delinquency and bankruptcy, that has long term impacts on economic growth.”
The central bank would have to quickly lower the overnight rate by one or even two per cent to avoid seeing many negative amortizations turn into delinquencies in 2024, he said.
Economists expect rate cuts as early as mid-2024. Late October, Governor Tiff Macklem told the parliamentary finance committee that central bankers need to start seeing inflation “on path” to the target of two per cent before cutting rates. Previously, he had stated that inflation had to reach target before the central bank engaged in any cuts.
The next interest rate decision is set to be announced on Wednesday morning.
In September, the bank held interest rates at 5 per cent but did not rule out the possibility of further hikes.
This article was reported by The Star
