What effect will that have? If some Canadians go underwater on mortgages, won’t others who were priced out be able to afford now? I guess some will lose jobs but what’s the big downside from a country perspective with having cheaper housing? Or are you concerned about immediate effects?
It's not only about being underwater on mortgages, but having your morgtage payment double (and maybe tripling soon...). Reddit is full of panicking homeowners who are starting to straggle with payments. This will have a wide effect on the whole economy because any discretionary spending will evaporate.
No, the US is the outlier with the 30 year fixed rates. Canada not only has variable rate mortgages, but instead of the rate just adjusting, they essentially have 5 year mortgages, with a balloon payment at the end. If you can't roll it over into a new load (say because your debt to income is now too high), you're screwed.
Wow - this is mind boggling. Also..kind of scary? I guess any big financial decision is scary but I didn't know that was America exclusive. Do you know if European countries have fixed rates or does it go up ever 5 years or so
supposedly about a 1/3 of mortgages are variable in Canada. But more importantly, fixed mortgages are almost all 5 year terms (or less). That is, every 5 years you have to renew your rate (even though the mortgage amount is for 25 years). That means every year, about 20% of homeowners are updating to the current fixed rate (assuming an random distribution of purchase date). Perhaps a big chunk renewed early in 2020, but by 2025/2026 all mortgaged homeowners will have a new higher rate.
Canadian mortgages have separate amortization periods (say 20 or 25 years for example) and interest rate terms (generally 1-5 years, after which the rate has to be renegotiated -- and you have the option of transferring the mortgage to another lender at that time).
You can also let your rate float with the market, which is called a variable rate mortgage.
> Do you know why mortgages in Canada are so different from the US?
The U.S. has been heavily subsiding mortgages since the great Depression, through programs such as FHA. Banks would not be willing to loan people money at such low rates over 30 years unless the government and taxpayers backed the loan.
The USG massively subsidizes home ownership. The burden is passed down to taxpayers, but also may cause a drag on the global economy due to lopsided interest rate hedging.
Nobody but the United States has long-term fixed rate mortgages: they're horrible for lenders because the lender has to assume all interest rate risk. The reason they exist in the US is because the government acts as a backstop due to pro-homeownership politics, but it causes a bunch of market distortions that are made invisible to American borrowers.
30 year fixed-rate is very much the norm here in Denmark. There was a period of experimentation leading up to 2007, but I think fixed rate is very popular. I'm certainly happy that's what we went for when we bought our first house two years ago.
Because it's more profitable for the lenders, and Canada's government is happy to bend over backwards to make old-boys-club-businesses like banks and telecoms comfortable.
