Mortgage stress threatens Canada’s major banks. What they — and consumers — can do – National | PKBNEWS

Canadian consumers are facing increasing financial pressure in an environment of higher interest rates, and this is something that Canada’s largest lenders are bracing for. But there are steps borrowers — and banks themselves — can take to soften the blow.

The latest banking results showed that the risks of a slowing economy are hanging over the country’s biggest financial institutions, many of which reported lower profits and higher provisions for possible loan losses in the third quarter.

Some of these banks say they are “comfortable” with the risk levels attached to their mortgage portfolios, even as the “pressure” is mounting on consumers in a rising interest rate environment.

Royal Bank of Canada CEO Dave McKay told a**lysts last week after announcing job cuts at the bank that the impact of rising interest rates and external factors like the China’s slowdown would serve to cool the Canadian economy.

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“We are seeing signs of slowing labor markets, as evidenced by slowing wage growth, shrinking job openings and rising unemployment in Canada. Therefore, our base case calls for a more subdued economic outlook,” he said on the bank’s third-quarter earnings conference call.

Scotiabank CEO Scott Thomson told a**lysts the bank was setting aside more funds for loans that could go wrong – a move mirrored by other major banks this week – amid signs of “worsening conditions.” recession” in the economy.

With many economists forecasting a slowing economy this fall as Canadians face higher debt costs and hedge against possible job losses or lower incomes, consumer spending has been surprisingly strong for much of 2023.

TD Bank’s latest consumer spending tracker released on Wednesday shows that while spending on discretionary goods is indeed down, still-strong demand for services such as travel and entertainment is proving a ‘catalyst’ for the continuation of the activity.

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“A higher interest rate would put pressure on the consumer. But we see so far that they continue to show resilience… but we are continuously watching very closely,” TD chief financial officer Kelvin Tran said in an interview with Reuters this week.

Meanwhile, the books of some of the big six banks show that the consequences of rising interest rates are 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 whose mortgages have yet to be renewed have yet to feel the brunt of the downturn. rising cost of borrowing.

Pedro Antunes, chief economist at the Conference Board of Canada, told PKBNEWS this week that only about a third of outstanding mortgages have ever been renewed in a higher rate environment, with “a lot of pain still to come.” .

What the Banks’ Mortgage Books Show

Among Canadians expecting higher rates are those who have variable rate mortgages with fixed payment schedules. While all variable mortgages see their interest rates rise and fall based on the Bank of Canada’s key rate decisions, those with static payments instead see their amortizations stretch or compress as they repay more or less interest on the principal loan.

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This may continue until a consumer’s monthly payments cover only interest and they reach their mortgage’s “trigger rate”, in which case a consumer may be forced to make regular payments or higher flat rates or lock into a fixed rate product.

Third-quarter results from RBC, TD Bank, CIBC and BMO all show that more than 40 per cent of their current mortgage portfolios have amortizations above the usual 25-year mark. When these mortgages mature, many consumers may be forced to revert to their original amortization period at current rates, which could result in much higher payments.

Variable-rate and fixed-payment mortgages were popular during the COVID-19 pandemic, when low interest rates helped many Canadians get started in the real estate market. Scotiabank and National Bank of Canada do not offer this type of variable product to their mortgage customers.

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

Among its peers, TD Bank had the highest proportion of mortgages amortized over 25 years in the second quarter of the year, at 48 percent. A TD spokesperson told PKBNEWS on Wednesday that the percentage of mortgages in the lender’s portfolio with amortizations over 35 years has declined quarter over quarter as customers engage in fixed rate products or increased their payments.

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The spokesperson added that in the “rare cases where help is needed”, TD Bank is supporting its customers with a “robust renewal strategy” which includes contacting customers before they reach their trigger rates, although that it did not specify what specific relief is offered.

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

The RBC spokesperson said it supports the FCAC guidelines and “has many practices already in place” to help customers, including proactive communications about renewals.

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

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PKBNEWS has reached out to CIBC for comment on how the bank is handling its customers with extended amortizations and was drawn to comments made by the firm’s chief risk officer during its earnings conference call on Thursday morning .

Frank Guse said CIBC’s proactive outreach efforts resulted in about 8,000 customers increasing their monthly payments and just over 1,000 customers making lump sum payments to exit amortized status negative.

He added that late-stage mortgage defaults “remain low” from pre-pandemic levels, and that variable rate products that represent a third of CIBC’s total mortgage portfolio “continue to show strong credit quality and yield”.

PKBNEWS has also reached out to BMO for comment, but has not received a response.

What should you do before renewal?

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

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The central bank’s next decision on key rates will take place on September 6, with some economists saying a further hike is on the cards amid stubborn inflation.

Regardless of how the Bank of Canada rates move, Zlatkin says the first step for any homeowner approaching their mortgage term is to contact your current lender and get a quote for the rate they will offer at the renewal, preferably at least six months in advance.

“Once you’ve received your lender’s renewal offer, contact a mortgage professional and make an informed decision about whether you can get a better rate elsewhere…or if it’s, in fact, the best renewal offer you can get — and then sign those documents,” Zlatkin says.

She warns that some homeowners who have secured very low mortgage rates in recent years may find themselves in a bind when it comes to switching lenders in today’s higher rate environment. A homeowner might not be able to qualify with a new lender at current rates, she warns.

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In those cases, Zlatkin says your existing lender might be the only one to turn to when renewing. That could lead consumers to offer unfavorable rates because the lender knows there’s little threat of competition elsewhere in the market, she says.

“This is where I think it gets really disadvantageous for consumers, because they can be put between a rock and a hard place.”

If someone finds themselves in this situation, Zlatkin recommends only committing to a renewed mortgage for two or three years to minimize the pain and hopefully strengthen your financial situation in order to qualify for a loan. another lender at the end of this period.

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

“Choose the term you need to weather the storm, then move on to something different,” says Zlatkin.

– with files from Reuters

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