Potential Problems with Canada’s Static Variable Mortgages

Negative amortization occurs when a borrower's mortgage payment is less than the interest due, increasing the outstanding mortgage balance. In this article, we will explore the percentage of negatively amortizing Canadian mortgages and households renewing mortgages in 2024-2025.

Negative Amortization in Static Variable Mortgages: A Temporary Solution?

Canada's major financial institutions noticed a significant rise in negative amortization loans for variable rate mortgages with static payments, impacting approximately 20-30% of certain banks' mortgage portfolios.

Static variable-rate mortgages may initially seem stable in terms of payments, but when interest rates rise, homeowners can face extended periods of loan repayment and larger outstanding balances.?

The potential for improving negative amortization may hinge on interest rate decreases, which would typically require a recession or a significant event to occur.

Impact of Static Variable Mortgage Renewals on the GTA Housing Market

In September 2022, low-rise house sales in the Greater Toronto Area (GTA) dropped by 42% compared to the previous year, marking a two-decade low for September.

Yet, statistics show that Canadian households haven't experienced the full extent of interest rate increases. According to recent financial reports from the Big Five banks, an average of 70,000 mortgages will renew each month at significantly higher rates from now until August 2024, which will rise to about 105,000 per month thereafter.

If interest rates remain at current levels, the GTA may face a significant challenge in 2024 and 2025, with almost one-third of Canadian mortgages coming up for renewal, potentially leading to 40-60% rises in mortgage payments for homeowners.

To sum up, negative amortizations are not sustainable in the long run, and eventually, the loan must begin to amortize. These loans will require adjustments, and amortization schedules must be revised upon renewal. Thus, lenders can assist in establishing a pre-payment plan to gradually reduce the mortgage balance rather than requiring a substantial lump-sum payment at renewal.

To read my future newsletters, simply join my network by clicking "Follow" and "Subscribe".

REALTOR? with EXP Realty, Brokerage

Certified Executor Advisor with?www.cicea.ca

Lifestyle?55+ Master Realtor with?https://www.seniorcareaccess.com/