Canadian homeowners, especially those in British Columbia and Ontario, see their amortization period extended by more than 90 years due to higher interest rates…but that’s not all.
Mortgage experts interviewed by Newsweek claim to have seen these changes for some owners who contracted with a variable rate with fixed monthly payments.
In order to pay the same amount every month, banks have to extend the amortization period for several years, sometimes up to 90 years.
As the prime rate increases, financial institutions have had to adjust their prime rate.
The latter rose from 2.45% to 6.95% between March 2022 and June 2023.
Experts warn that the consequences for these borrowers’ portfolio are significant.
For example, a borrower who takes out a 25-year mortgage of $500,000 at a rate of 5.80% will pay about $448,000 in interest.
A number that could rise to about $2,124,000 if the mortgage is extended beyond 90 years.
“Interest rates have gone up so much that the only way to keep the monthly payment unchanged is to extend the loan amortization period,” said Holden Lewis, a housing expert at NerdWallet.
If the owner wants to sell his house, he may find himself in an unfortunate position, while he will not have enough stocks accumulated.
David Stevens, former CEO of the Mortgage Bankers Association, warns borrowers about the risks posed by fixed monthly payments, but also for risk managers.
The expert explains the situation in which the owner may find himself after 10 years of repayment.
“Since the average homeowner has owned their home for less than 10 years, the inability to develop capital can lock them into their residence if they want to sell it, but don’t have enough money to pay all the costs of the sale,” he says.
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