Banks aren’t the only lenders facing clients under pressure as rising interest rates ramp up monthly payments for borrowers who piled into the real estate market during a period of historically low rates, including at the peak of the COVID-19 pandemic in 2021, before the Bank of Canada rolled out a steady stream of rate hikes.

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Credit unions and cooperatives, too, are dealing with a swathe of customers facing monthly increases in financing costs to the tune of hundreds of dollars. Like the banks, these financial institutions have raised their provisions for credit losses and are negotiating with customers to lengthen mortgage amortization periods to give them breathing room or working out a schedule for increased payments to avoid accumulating more debt that will have to be paid down the road.

“Sometimes, it’s just to increase payments. Sometimes, we help them to maybe just reshuffle their budget a bit,” said Guy Cormier, chief executive of Desjardins Group, Canada’s seventh-largest financial institution by assets, trailing only the country’s largest banks.

Renewal crunch to come

While significant losses haven’t materialized, Cormier said he is concerned about mortgage renewals beginning in a couple of years when a raft of fixed-rate mortgages with five-year terms end. He estimated that around 10 to 15 per cent of Desjardins members could be under stress.

“The challenge is probably 2025-26 when we will see on the fixed-mortgage rates increase, it could be maybe $500, $1,000, $1,500 in increased monthly payments,” he said. “That will probably be a challenge. That’s why we are provisioning (for) some losses eventually.”

Two-thirds of mortgage borrowers in Canada said they are “having trouble meeting their financial commitments,” according to a June 13 report by the Financial Consumer Agency of Canada (FCAC). The regulator urged lenders to work with clients to manage their mortgages in the short term, using measures such as extending the amortization period to pay off loans beyond the typical 30 years.

Different rules

Mortgage underwriting at credit unions in Canada is not always done in lockstep with the strict standards imposed on the country’s federally regulated banks because credit unions mostly operate under provincial regulation.

For example, the majority of mortgages at Meridian Credit Union Ltd., Ontario’s largest credit union, are compliant with the rules imposed on the banks by the Office of the Superintendent of Financial Institutions (OSFI), but about 30 per cent are subject to separate criteria established by the credit union and approved by the Financial Services Regulatory Authority of Ontario, the provincial regulator.

To accommodate self-employed homebuyers and others who might not qualify for a bank mortgage, this subset of mortgages isn’t subject to OSFI’s B-20 guidelines that include a strict “stress test” requiring uninsured mortgage borrowers to qualify at 5.25 per cent or the contract rate plus two percentage points, whichever is greater, said Jay-Ann Gilfoy, Meridian’s chief executive.

The bank stress test was introduced when interest rates were at historic lows for an extended period and was meant to provide a built-in cushion to manage higher rates. But even with loans that weren’t qualified based on that criteria, Gilfoy said Meridian has not experienced any concerning trends in its residential mortgage portfolio beyond what the big banks have seen as the key overnight interest rate set by the Bank of Canada soared to five per cent from 0.25 per cent in early 2022.

Loan losses light so far

“We’ve planned for more loan losses this year as I think all financial institutions upped their loan-loss allowances,” she said. “But we haven’t seen it materialize as anything out of the ordinary. I think the loan losses are coming in a little bit higher potentially than the last couple of years when they were at historical lows for all financial institutions, but nothing that we’re worried about.”

Around 20 per cent of Meridian’s mortgage portfolio matures every year, and the credit union is projecting a moderate uptick in 2025 and 2026.

For now, Gilfoy said, real estate values, a strong employment picture and recent wage gains are providing some comfort to mortgage lenders.

Average loan-to-value (LTV) ratios are hovering around 61 per cent at Meridian, she said, below the 65 per cent LTV trigger that the federal banking regulator is planning to require so that big banks mitigate their risks by holding more capital against mortgage loans where monthly payments only cover interest.

“We’re confident that they have enough room to be able to weather (the situation),” she said of Meridian’s members.

One of the biggest concerns for the big banks and OSFI has been “negative amortizations” that are occurring frequently with a popular type of home loan called a variable-rate fixed-payment mortgage. As interest rates rise, a borrower’s usual monthly payment can fail to cover even the interest, pushing out the number of years it will take to repay the mortgage or triggering dramatically increased monthly payments on renewal.

Meridian also offers variable-rate fixed-payment mortgages, but said in a statement that it does not have the same level of exposure as many of its lending peers.

“Our borrowers have consistently demonstrated great strength and stability, and while there is a segment facing a higher interest rate … there are no current indications that repayment behaviour is at risk,” the credit union said.

Desjardins also offers this type of mortgage, giving borrowers the option to increase their payment at any time — up to double — or when the key interest rate rises. Amortization periods can be extended beyond 30 years “on an exceptional basis,” the financial institution said, adding that “few cases have been authorized.”

Cormier said he’s concerned about any anticipated stress in its mortgage book in the next few years, but he doesn’t expect widespread defaults.

“It doesn’t mean that this 10 to 15 per cent (of members) … won’t be able to keep their house. It just means that with them, more proactively, we have to work harder to prevent or prepare,” he said. “Right now, there’s still, from our perspective, a lot of equity and value in the houses that they bought five, six years ago.”

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