Crazy Money! Canada Extending Mortgage Amortizations
It’s Crazy Money Day!
A variable-rate mortgage is a home loan without a fixed interest rate. 1/3 of Canada’s residential mortgages are adjustable rate loans. Their lenders typically require borrowers to make fixed payments. When interest rates rise, more of the payment goes toward paying interest rather than principal, extending the amortization period. Some Canadians have extended their amortization periods to more than double the typical 25 years. Some are now as long as 90 years! I think that’s crazy! Amortizations have been extended automatically by lenders to protect households from greater borrowing costs, but the higher debt load is a concern to regulators. Higher interest could hit the trigger rate – where interest exceeds the fixed payment. This could lead to forced home sales, higher delinquencies, or a depressed housing market.
Extending amortizations was a temporary solution to prevent higher payments, but lenders will eventually force customers to pay down the principal. If not, homeowners will have generational mortgages: mortgages that are passed on to their children. Lengthy mortgages keep borrowers in debt and increase the amount paid in interest. Borrowers should prepare for a spike in payments assuming interest rates remain high, but there’s a solution. Begin paying extra towards your principal every month and raise income or reduce expenses to prepare for the higher payments. Now that’s a crazy example of borrowers being slave to their lenders!
Now I invite you to join us at Crown’s 2023 Reunion. We plan to gather October 12-15 at Ridgecrest Conference Center near beautiful Asheville, North Carolina. For more details and to register, go to crown.org/reunion.