Canada could be on the verge of a mortgage default crisis and our political leaders should have known better.
The Bank of Canada is ratcheting interest rates in an effort to control inflation. And there could be some big hurt on the horizon for home buyers who jumped into the market at the wrong time.
A few days ago Bank of Canada deputy governor Carolyn Rogers announced that half the people with variable-rate, fixed-payment mortgages have hit their trigger rates.
Trigger rate means interest rates have risen to the point that a person is no longer paying down the principal— the money they borrowed—and are only paying interest on the loan.
According to Rogers, 13 percent of all mortgages in Canada have hit their trigger rates
With market rates expected to continue rising, the central bank says 65 percent of variable-rate, fixed-payment mortgages will hit trigger rates by the middle of next year.
So what does all this talk of percentages and trigger rates mean? Is it possible that these people will be in mortgage debt forever, perpetually paying only interest and never reducing their home debt loads?
More likely, lenders will force folks to increase their monthly payments to cover more of the interest and some of the principal.
But for people who were already at their max when they got their variable rate mortgage, an increase in monthly payments could put them and their families over the edge financially.
Others will be allowed to dip into negative amortization. So their monthly payments will stay the same, but the number of years they’re making them will grow. But that means the overall size of the loan—the total debt—will also grow.
Worst case scenario, people will default on their mortgage, lose their home, and the bank will take it back.
Any way you slice it, it’s a loss for those mortgage holders.
Here’s the thing. We’ve had cheap money for far too long. So individuals and the government have become addicted to these low lending rates.
Regular folks got hooked because, for years, it’s been pretty easy to get mortgage financing and at fixed rates of less than 3 percent. But today, they’re pushing 6 percent. On top of that, property values have only gone up.
Government got addicted because low rates propped up one of Canada’s favourite measuring sticks for economic health—housing starts. As long as new houses are being built in Canada, we think we’re sitting pretty economically.
But is that actually true? It looks like we’re about to find out.
We’ve been talking about the housing bubble for years in Canada. Even economists outside of Canada have been wondering when it’s going to pop.
The Bank of Canada, with government’s support, had plenty of chances to raise interest rates. They didn’t have to go up enough to throw a wet blanket on the market and snuff the home ownership dreams of hundreds of thousands of Canadians.
But they could have gone up just enough to cool our national obsession with the real estate market and the quest to own property at any cost—or at least to have our name on a land title deed.