Todays mortgage market may cause Canadians to renew with extended amortization
Source: https://torontosun.com/opinion/columnists/lackie-lifetime-mortgages-becoming-the-new-normal
Why variable rates with fixed payments are causing payment shock on renewal
A variable rate mortgage is a type of home loan in which the interest rate can fluctuate over time based on changes in the market conditions. Historically, borrowers with variable rate mortgages typically pay a lower interest rate than those with fixed-rate mortgages, but the interest rate can rise or fall at any time during the term of the loan.
In Canada, some borrowers with variable rate mortgages choose to make fixed payments, which means they pay the same amount each month, regardless of any changes in the interest rate. If the interest rate rises, the amount of the borrower's payment that goes towards paying down the principal decreases, while the amount that goes towards interest increases.
This situation can lead to negative amortization, which means the amount of principal owed on the mortgage stays the same or actually increases over time, rather than decreasing as it would with a traditional mortgage. Negative amortization can occur when the interest rate increases causing more of your monthly payment to go to interest while lowering the principle paid. Lowering the amount of principal paid will slow down the rate at which you pay down your mortgage, thus increasing your amortization. In extreme cases, negative amortization can occur when the borrower's monthly payment is not large enough to cover the full amount of interest charged on the loan. In such cases, the unpaid interest gets added to the principal balance of the loan, increasing the amount the borrower owes.
In Canada, there was a period of time where mortgages had amortizations over 30 years, which can compound the negative amortization problem. If a borrower's mortgage comes up for renewal and their payments are not sufficient to cover the interest, they may be forced to extend the term of the loan or sell the property to avoid defaulting on the loan.
This situation can have serious consequences for both borrowers and the overall housing market, as it can lead to higher levels of debt and a potential increase in foreclosures. To address this issue, the Canadian government has implemented policies such as a Code of Conduct to Protect Canadians with Existing Mortgages, which aims to provide relief measures for borrowers facing financial difficulties and prevent a potential market shock.
