Canadian mortgage prison | About That

Imagine you're pushed out of a plane.You're plummeting towards the ground.But no problem, you have a parachute.Except you pull it and you look up at the canopy and it's got a giant hole in it.This is what's happening to homeowners who thought the value of their home was worth enough, was enough of a parachute against the crushing weight of higher interest rates.And this happens all over, but it's especially bad in the Toronto area, where the Bank of Canada expects nearly 1 in 10 people to be in a situation where that math doesn't quite work.

Let me explain this mortgage prison.So take yourself back five or so years to when interest rates were at historic lows.The pandemic wrecked the economy.So the Bank of Canada slashed interest rates to stimulate spending.The key policy rate almost zero percent.Just a quarter point.

It's by far the lowest that they ever went.It was a it was a an indicator as to how precarious the state of the Canadian economy was.

So if your timing was just right, you bought or locked in for a healthy five -year mortgage term at an insanely low rate.And maybe you really stretched your budget then because you've never seen an opportunity this good before.But five years later, interest rates are up and you have to lock in at a new rate that's a lot higher.Enough to cost you a few hundred dollars more a month that you just don't have.Most Canadians in this situation refinance by asking the bank to stretch out the length of their loan.Because if you owe the same amount of money over a longer period, then each payment is smaller, but you pay more interest overall.

And that last part, more interest, is why banks will typically go along with this.But... if the value of your home tanks?

It's higher risk for the lender to lend out money for a property that's simply not worth it.

And this is where we get back to the Bank of Canada's warning that nearly one in 10 Toronto homeowners will be in this situation where thevalue of their homes ends up wiping out their wiggle room, their leverage.their collateral, their parachute just isn't solid enough anymore for a bank to keep wanting to gamble that they're good for the money.

So banks will limit their exposure by saying there's only a certain amount that we're willing to mortgage compared to the value of your home.

And this is where a conversation with your lender can help find a creative solution, but which may involve simply selling your home.The good news, the national average for people in this situation is lower than in major markets like Toronto or Vancouver, just 4 % across Canada.But to be in that very small group, to no longer be able to afford the wealth you live in, that's a hard place to get out of.