Mortgage Problems...And Solutions?

Canadian homeowners are facing massive challenges in the shifting economy. A growing number of folks are struggling to make mortgage payments, and worrying about their financial futures. It can be really overwhelming, and sometimes a little nauseating to keep up with it all... I'm doing my best to stay in the know, and I wanted to share a little bit of what I've learned with you.

Let's chat about negative amortization, over leveraged homeowners, and the Canadian Mortgage Charter that was announced earlier this week.

Negative Amortization

Negative amortization occurs when the loan repayment amount is less than the interest paid on the loan and the outstanding balance on the loan actually increases. Unless payments increase, this means that the time it will take to pay off the loan is extended. In real estate, negative amortization means that you could be paying off your mortgage for decades longer than originally expected.

According to the CBC, 1 out of 5 mortgages held at select major Canadian banks(BMO, TD and CIBC) are currently negatively amortizing.This represents some $130 Billion of household debt in the form of mortgages that have been stretched out past the standard 25 year amortization period to 35 years, 40 years or even longer.

This is the kind of thing that should be taught in schools...I'm sure many who find themselves in this situation would never have considered this a possibility. And with about 100,000 mortgages up for renewal every month in Canada, we can expect to see even more folks facing negative amortization. I've been recommending that folks speak to a mortgage professional far in advance of their renewal date so that they can understand and prepare for what that renewal will look like for them in the changing mortgage landscape.

Over-leveraged Homes

It's not an entirely new concept, but over the past few years Canadians have been increasingly sold the dream of financial freedom through real estate investment. It's easy!!! All you have to do is refinance your primary residence or take out a HELOC(Home Equity Line of Credit), use that cash as a downpayment on a condo or a small house (bonus if there's 2 units in the home!!!), find a great tenant and sit back collecting the cheque!

Except...it doesn't always quite work like that.

In this pursuit of financial prosperity, many Canadians have stretched their financial limits. Now, interest rates have increased(and even if they decrease in 2024, are very unlikely to return to 2020 levels anytime soon, if ever), and home values have decreased. For many, the monthly cost of holding multiple properties has gone way up, and many homeowners find themselves navigating the complexity of managing properties with debts that outpace their property values.

Look, I'm not against folks purchasing a second or third property, taking on tenants, and holding on to that asset while it appreciates over time as someone else handles part or all of the mortgage payments. But I am against the narrative that this is an easy path to "passive income". It's not easy, and profit is not guaranteed.

Canadian Mortgage Charter

This past Tuesday, Finance Minister Chrystia Freeland announced the Canadian Mortgage Charter, an initiative aimed at reshaping the mortgage landscape and offering a shield of protection for homeowners facing financial insecurity.

It's important to note that this charter is not law, nor are there plans for it to become law. Rather it is a list of government rules and expectations that banks should follow. So....if the banks don't comply, the government isn't going to be MAD, but they will be DISAPPOINTED(I kid, I kid...kind of).

There are six key parts of the charter:

Allowing for temporary extensions of amortization periods for at-risk mortgage holders.

Lenders will waive fees and costs that “would have otherwise been charged for relief measures.”

When borrowers switch lenders at renewal, financial institutions must not require insured mortgage holders to requalify under an insured minimum qualifying rate.

Financial institutions need to contact homeowners four to six months ahead of a mortgage renewal and make them aware of their options.

At-risk homeowners will have the ability to make “lump sum payments” without prepayment penalties to avoid a negative amortization or sale of their principal residence, according to the charter.

Lenders must not charge interest “in the event that mortgage relief measures result in a temporary period of negative amortization

I've been wrapping my head around these measures and trying to figure out which, if any, will be most effective in providing relief to Canadians. I think that the third point, dropping the requirement for re-qualification upon switching lenders might be impactful for some. The second to last point, no repayment penalties for lump sum payments may be significant as well. But who defines 'at risk homeowners'?

I have also seen a lot of criticism that many of these measures are actually already in place, and that this "new" charter doesn't represent any real change at all. It is incumbent on the government to provide relief to Canadian homeowners-time will tell if the Canadian Mortgage Charter will be that much needed relief.

This has just been a little bit of an overview on some of the things I've been reading about mortgages in the news lately. I think the common thread is really underscoring the importance of an informed and thoughtful approach to home ownership. If you have questions or seek personalized guidance on navigating real estate, let me know by commenting below, filling out the contact form on this website, or sending me a DM on Instagram @ruthelizabethlewis

Sources

Daniel Johnson, BNN Bloomberg, "How will the Canada 'mortgage charter' impact homeowners, bank earnings?" November 22 2023

Emerald Bensadoun, The Globe & Mail,"What is the Canadian Mortgage Charter? Everything you need to know about the country’s new housing initiative?" November 22 2023

Peter Zimonjic, CBC News, "The new Canadian Mortgage Charter explained" November 23 2023

Pete Evans, CBC News "A 47-year mortgage? They're out there — and even longer ones could be coming" October 5 2023

Santo Sesso, YouTube, "Overleveraged Homes a Scary Reality for Many in Brampton, Mississauga and Durham" November 15 2023

Disclaimer: The content provided on this website is for informational purposes only and should not be construed as financial or real estate advice.

The material presented here is general in nature and is not intended to substitute professional guidance. We do not accept responsibility for any consequences arising from the use of the information provided on this website.