In Canada, one of the top stories continues to be the real estate market and mortgage rates.
The interest rate on fixed mortgages recently rose by 10 basis points, which is not bad considering the trend we have been experiencing. However, if you are looking for only a one-year mortgage at a fixed rate, that has increased by 20 and up to 25 basis points, depending on the lender.
Most of the mortgages at the major Canadian banks are amortized with at least 30 years left to go. Amortization is the repayment method that calculates each monthly payment so that it includes both principal and interest. As the principal is reduced, the interest payment is less so that each month the owner pays more on the actual debt and less on interest, although the payment amount remains the same. The idea is that over time the principal will hit zero, and the loan is paid off. The monthly mortgage payment is a fixed amount, and the interest is paid first, and whatever is left goes toward the principal.
Unveiling Negative Amortization
However, if it is a fixed monthly payment but the rate of interest increases, then less of the principal is being reduced, which means the mortgage won’t be paid off in the 30+ years it was scheduled for. This is called negative amortization. The duration or overall time of the loan actually extends beyond what was anticipated. Poor regulatory practices have caused a significant increase in negative amortizations.
The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada reporting to the Minister of Finance, wrote to Parliament to allow the ability to extend amortizations to avoid delinquencies. Previously the OSFI opposed extending amortizations because it would cause homeowners to be in almost unending debt.
An additional factor to consider is that some homeowners have been issued lines of credit in addition to their mortgages. These lines of credit are also secured by the real estate, just like the mortgage. When a lender looks at the combined debt of the mortgage and line of credit, it exceeds the owner’s credit rating or the current value of their house. Although it may be a violation of the rules of lending, since it exists, it is feared that defaults will be declared.
Challenges Faced by Homeowners and Investors
In addition to all of this, in many cases, rental rates for comparable properties are lower than what homeowners are currently paying for their monthly mortgage. Investors find themselves in similar circumstances where they cannot meet the increasing payment requirements and may be asking for allowances to prevent default. The short solution for many will be to put the property up for sale to get out from under increasing debt.
These are complex issues surrounding home mortgages and lending requirements. However, sellers are reducing the asking price of properties, making it a good time for a value purchase. If you are in the market, contact easyhouseloan.ca for the latest information about real estate lending operations in Canada and to find the optimum rates and terms.