In February of 2022, George Chalmers finally saved up enough money to buy a condo near Yonge Street and Eglinton Avenue in Toronto. To him, it was the perfect condo, especially with a five-year variable mortgage rate of only 1.4 per cent.
Chalmers’ bank offered him a variable-rate fixed-payment mortgage, which Chalmers believes was not a good decision. Since the mortgage adjust to rising interests rates, if the rates increase, the monthly payments stay the same but the amortization period rises.
When interest rates started hiking in March of 2022, Chalmers watched his mortgage increase to a startling 6.4 per cent. He was only able to pay off the interest on his mortgage several times, so the length of his mortgage has grown.
Dream homes are turning into nightmares
Cora Cook, a Barrie resident, was forced to put her family’s home up for sale after her monthly mortgage payments skyrocketed from $2,850 to $6,200 in around a year.
Cook works and her husband has two construction jobs, yet that still wasn’t enough to make payments. Cook’s family held several garage sales just to meet their mortgage payments.
Experts believe there will be a rise in mortgage defaults as renewals continue to rise.
After taking a trip to the bank, Chalmers was hit with the reality of Toronto’s housing market. When looking at how much his amortization period had grown, he was shocked to see an infinity symbol.
I couldn’t believe it
George Chalmers
Chalmers soon learned that when the amortization period goes beyond 55 years, they use an infinity symbol.
Experts say the housing market is in this situation because of the pandemic which saw an increase in record savings due to financial support programs and Canadians staying home. Many Canadians bought houses because of savings and borrowing money was cheap.
In May, the International Monetary Fund (IMF), reported that Canada tops the list for mortgage defaults.
In June, the credit research firm Equifax Canada, reported that Canadians with mortgages are defaulting nonmortgage expenses such as credit cards.
Typically, homeowners will do anything to avoid defaulting on mortgage payments, so they’ll start defaulting on credit card or car payments first
Rebecca Oakes, vice-president of advanced analytics at Equifax Canada
There are two types of variable-rate mortgages, and one is causing a big problem. A variable-rate fixed payment, which Chalmers opted for, and an adjustable-rate mortgage where the payment increases and decreases with the prime rate.
The variable-rate fixed payment is posing a big concern for homeowners because many mortgages are now growing instead of shrinking. When renewal comes around, they’ll also have higher interest rates.
Many economists believe the Bank of Canada caused inflation to rise too quickly after leaving the lending rate too low for too long. Canadian homeowners are feeling the brunt of this burden.
In the second quarter of 2022, TD, RBC, and CIBC reported that 25 per cent of mortgages had amortization periods of more than 35 years. This is shocking compared to the previous year of no mortgages with amortizations beyond 35 years.