A whole lot has been made of the predicament some homeowners with variable-rate mortgages are in these days, and it is definitely not a situation where a mountain is being made out of a molehill. There are homeowners who are having to accept 3-digit or more increases to their monthly mortgage payments, but at the same time there are others who are taking advantage of their lender bank’s ability to be flexible. Certainly any time it relates to your family’s shelter it will make sense to be creative any time there’s opportunity for it as it relates to continuing to afford the home you’ve purchased.
Borrowers are navigating a massive surge in interest rates, and most realtors will have had at least one discussion of this sort with first-time homebuyers. Few if any of them if any that aren’t buying homes without taking on a mortgage of some sort, so it certainly is a relevant topic. Some of those same realtors may be dealing with the ongoing chill of the market, even though it has picked up somewhat from where we were with the Fall of 2022.
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Moving back on track with the topic, let’s continue to look at this flexibility and what exactly some mortgage holders are doing to roll with the punches right now.
Add to Principal
What these owners with variable-rate mortgages are doing is tacking unpaid interest onto their mortgage’s principal, and doing that instead of paying the full amount each month. Some others are just paying interest only. What would be the advantage in that?
We know that borrowers are trying to navigate a massive surge in mortgage rates that has resulted in higher costs while house prices have fallen. Definitely not a good mix, and it’s especially a problem here in Canada where a significant portion of total mortgage debt is floating rate. This means that homeowners are regularly faced with the reality of borrowing costs that are way higher than expected.
And one that’s not nearly the same problem in the US because of the greater ease you have with negotiating a 30-year mortgage that has a fixed rate there. So with banks allowing borrowers to add unpaid interest onto their loan’s principal or stop paying down the principal each month, the banks are actively preventing defaults and any forced home sales.
The long and short of this is that lenders have become more flexible and realizing it benefits them in the long-term to do what they can to accommodate good-paying borrowers and keep them in the homes they’re buying over the long haul.
Paying Off
This flexibility is working out well in the big picture, despite Canadian home prices enduring a 16% slump and borrowing costs having nearly doubled. Mortgages are in arrears though, and this means that loans that are 3 or more months behind on payments still only work out to under 0.20% of outstanding loans as of this time.
How the lack of distressed sales relates to providing a ‘floor’ for the housing market is this; the major shortage of new listing from February forward this year has created the tightest national market since April 2022, and prices in more in-demand metro markets are beginning to rebound as the scarcity of housing supply becomes an even more emphatic reality of those cities.
Banks are taking the approach that they’re willing to overlook people being evasive with their payments to some extent, with a belief that just looping it onto the balance isn’t such a bad thing despite it depressing inventory further as homeowners who might otherwise have no choice but to sell find ways to hold on to their homes.
This flexibility is helping both sides of the system avoid bigger problems along the way. Losing the home is the worst-case scenario for the owner, and then there’s the way too much inventory hitting the market all at once could sink property values further. This would result in it being harder for the banks to get their money back in the event of a default, and especially if the scenario had them needing to sell the houses themselves.
The last thing to mention with this entry and in relation to those unpaid amounts is that if they are added to the principal instead this results in ‘negative amortization’ where the loan effectively grows despite borrowers making regular payments. As consumers take longer to repay the debt, the new expectation is that many of those mortgages to be amortized over more than thirty years.
We can understand that the profits that come with longer amortization periods on mortgages mean that banks are expected to show flexibility to customers when the economic circumstances demand it, and that’s exactly what’s happening right now.
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