And then, if I look at fixed, that payment buffer that I said was 2 times for VRM is actually at 3.5 times for fixed. And so, the fixed rate customer is holding onto a little bit more of a payment buffer, but we’re very conscious of the fact that in ’24 we have about 10% of our fixed rate portfolios repricing. And that moves into 20% in 2025 and another 20% in 2026. So, we’re watching the consumer trends and the consumer behaviors in the VRM and being able to extrapolate some expectations of what may happen on the fixed rate book. We are optimistic that we’ll see interest rates start to decrease at the latter half of 2024. So that’s built into some of our thinking as well. And then maybe lastly, I can’t remember who asked me about tail risk at one of our previous discussions, but maybe just to give an update on where the tail risk is in the mortgage portfolio, we have about — of the less than 1 million customers we have with mortgages in Canada, the tail risk is about 2,500 today.
That’s up from — that’s up about 200 customers quarter-over-quarter and about 1,000 customers year-over-year. Just to give you a sense of sort of — people are managing through, but they’re making trade-offs and some choice and difficult choices obviously.
Darko Mihelic: Thank you for that. And just to confirm, the way I should think about your variable rate portfolio customer is that they have a higher FICO score, and generally underwritten a bit tighter than your fixed rate portfolio. Is that still true?
Phil Thomas: Yeah, I mean, we definitely at origination see higher FICO scores, but we also find the VRM customer tends to be a sophisticated customer because they’ve been playing the rate game within the market. So, they’re perhaps a little bit more savvy.
Darko Mihelic: Okay. And is there any other characteristic you can share, for example, postal code or something like that [indiscernible] higher delinquencies? Something — is there anything else you could provide on any other defining characteristic here?
Phil Thomas: No, it’s interesting. I asked the question with my team last week, what are we seeing from a regional perspective? And there’s no regional trends across the country on this.
Darko Mihelic: Okay, great. Thank you very much.
Phil Thomas: Thank you.
Operator: Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Sohrab Movahedi: Okay. Thanks for going over time here. Just two quickies, hopefully. Phil, a couple of times when you talked about expert credit judgment, I think you mentioned business banking. Is there a specific pocket within business banking or industry group or a particular area that’s concerning you?
Phil Thomas: No. I mean, our portfolio — we have a good portfolio. We’ve been conservative in our underwriting and criticized for such at some points in time. But we are thoughtful about real estate, as I think everybody is in the market, and we have built specifically for real estate. As I mentioned in my prepared remarks, we don’t have any significant exposure in U.S. office, but we’re thoughtful about the markets here in Canada and we’ve been building appropriately on the performing side for that.
Sohrab Movahedi: But that would be specific to the Canadian business banking portfolio…
Phil Thomas: It would be specific to the…
Sohrab Movahedi: …specific judgment that was exercised?
Phil Thomas: Correct.
Sohrab Movahedi: Okay. And Raj, I know we’ve talked over the year — past couple of years, I suppose, about the importance of moderation in the overall rate environment, just given the way you are positioned from an asset liability management perspective. Can you remind us, if we were just going to take a shortcut and take a look at either the 10-year Canada’s or the 10-year U.S., like around what sort of levels are you — would you hit the inflection point where this drag turns into a positive? Like I know it becomes less of a drag, I suppose, with declining rates, but what do we have our eye on? Do we want to get back down to a 10-year of 3.5%? Is that nirvana?
Raj Viswanathan: That would be nice, Sohrab, as you know. I think — so we took some actions in Q2, right, in 2023 to position the Bank to be appropriately depending on the rate situation being higher for longer. And I think that’s actually paid off in spades, because we have done the right thing. It has reduced the level of drag we could have had otherwise based on the positioning that the Bank had prior to that. So today, we position neutral to the rate curve in one respect. But the expectation is if the forward rates played out, maybe that’s an easier way to think about it, Sohrab, at this time, we’re going to see some reasonably meaningful benefits to the net interest income line through 2024 and beyond. That’s the best we have at this time.
But the 3.5% that you quote is when interest rates completely stabilize. And how long that will take is anybody’s guess. I think the market’s pricing is somewhere around 2025 from what I know. But these things do tend to change quite a bit. But at this time, I think we are, in my mind and in our minds, positioned the best we can be based on the structure of our balance sheet and how we see the forward rates play out, which is being neutral to it at this time. Higher for longer through a good part of ’24 is likely going to be the outcome. And after that, as you pointed, when rate cuts come, we’re going to benefit.
Sohrab Movahedi: I appreciate that color. Thank you.
Operator: Thank you. Our following question is from Mike Rizvanovic from KBW Research. Please go ahead.
Mike Rizvanovic: Hey, good morning. I want to go back to Phil and I’m just looking for very high-level guidance here on one specific number. So, in looking at your mortgage book, I think you’re sitting at a 49% loan-to-value. I’m just trying to better understand how much of that gets eroded by the process of taking over home and selling it, so between commission, legal, admin, any other costs related to that process, what’s a good proxy that we should use based on a percentage of the home price? Like, is 10% a reasonable number? I get asked this question quite a bit by clients. I just want to get your insights on that.
