Homeowners in Canada are edging closer to mortgage default as many near the “trigger point” on their loans, according to a federal memo to the superintendent of financial institutions.
A trigger point is when the amount of interest is equal to the fixed monthly mortgage payment, meaning that zero is going to pay off the principal of the loan. At this point, nothing is being paid down on the mortgage itself. If interest rates keep going up, those with variable rate, fixed payment mortgages will need to pay more just to cover the interest payments.
The memo, directed to Peter Routledge, says that a “large number” of homeowners could experience this “payment shock.”
“The large number of borrowers that will experience this payment shock is a concern,” the Nov. 2 staff memo to Mr. Routledge said, as first reported by Blacklock’s Reporter. “We estimate that mortgages such as these total $369 billion outstanding in a mortgage market of $2.1 trillion.”
The memo went on to say that the superintendent’s office has advised financial institutions “to be proactive” with mortgage accounts “to act before levels of borrower stress become unmanageable.”
“We expect lenders to take early actions including proactive outreach to vulnerable and impacted borrowers such as increasing mortgage payments, making lump sum payments and renegotiating their mortgages,” it said.
“At present variable rate, fixed payment mortgages make up about 24 percent of current outstanding loans,” said the memo. “Before the latest rate hike, for illustrative purposes, over 70 percent of these were already projected to take over 40 years to be paid if the payment amount and interest rate at that moment would maintain forever.”
The document said that number was expected to be higher now, meaning borrowers will experience “payment shock.”
“It’s evident that mortgage holders facing a more challenging rate environment upon renewal are exploring options to mitigate the impact—notably, nearly 29 percent say they plan to refinance their mortgage loans,” says Ratehub’s director of content, Penelope Graham.
Of those surveyed, many have already been looking at ways to cut housing costs, with 24 percent saying they will downsize, and 28 percent plan to refinance. Seventeen percent are looking for an alternative lender. Over half said they were tightening up on other expenses (54 percent).
