‘Mortgage prison’: Trigger rates and negative amortization explained | About That
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- Опубликовано: 8 мар 2023
- Variable-rate mortgages can be high-risk and high-reward. But what happens when it doesn’t pay off? Andrew Chang explains trigger rates, negative amortization and how homeowners can actually lose equity while still making payments.
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Love seeing all the real estate agents in the last couple years saying it’s an amazing time to buy. Now their again saying it’s a great time too buy. Why you don’t trust people that work 100% on commission.
I've never heard of a real estate agent say it's a bad time to buy.
90 % of agents dont even understand economics. Just in this racket for the commissions. Sign here sign there, count bedrooms and bathrooms and give me thousands of dollars 🤣🤣 ya... ok buddy. We saw a wave of uber drivers in those "real estate schools".
I think its time to change the pay of agents commissions from percentage to a fixed amount. Were not in 1950s anymore where houses cost under 100k. And with todays technology they are becoming even more useless.
They seem to be the only profession that can lie without consequences
@@crystaloelke298 and they’ll still smile in your face while you over paid 150k
Rates aren't even particularly high right now, historically. We may see 6-8% overnight rates this raising cycle if everything doesn't go perfectly.
I really like the way Andrew explains things.
And the sad part about the current rates, is that they're not particularly that high.
$700k mortgage goes up 3% and thats $2100 buck higher than what you singed onto when Tiff Macklem promise rates would remain low for the foreseeable future. This when even the IMF was warning Justin about his drugged sailor spending.
Well even before the pandemic when inflation was 2%, the BoC rate was 1.75% so the current 4.5% rate does seem very high for many Canadians. Especially young families with a mortgage. I could see both sides.
@@annalee5751 Tiff fooled lots of people. I myself included. his forseeable future was 1 year...
except housing prices are already so high(er)
@@eddycpl I feel for ya bro. First rule, the gov is not your friend. Did you get the jab too? Oops.
Sorry, this is not a joking matter period. Its going to take you down and like the tide, the rest of us with you.
Not only has this regime destroyed the new home buyers, but the savings of us older people as well.
So sick of people voting for a gov thinking they will get freebees. So sick of a gov that keeps printing money to give out freebees.
Things are about to get nuts. Poking the Bear to svb going under waiting for the rust belt coal miners to bail out the California elites....AGAIN.
It's funny how during the pendemic people went mental buying houses when so many people were supposedly not working but the government was giving out large sums of money
You didn't touch on housing prices going down to where they owe more on the house than they can sell it for
Here is a reason why I always caution people who are looking to purchase a home. Everybody talks about how renting is like giving your money to someone else so many people rush the process of home buying and end up in these risky and expensive mortgagen that end up setting them back financially for many many years.
This is proof people like to think short term and get in over their head with debt… I mean monthly payments
Big 6 Canadian banks and the mortgage fraud. An audit is required on how mortgages are given to people on fraud income documents. Mortgage fraud is the root cause of every problem in Canada which includes inflation, over valued of real estate in Canada, debt crisis. Government intervention is required to save canadians and Canadian economy
This
I'm always waiting for the government to fix problems they helped cause
Only thing that annoys me in this video is that he says rates have gone up the last 3 years, from 0.25% in 2020 to 4.50% today. Well not completely false but actually rates were 0.25% just a year ago, the's been 8 consecutive rate increase in less than a year, from 0.25% in March 2022 to 4.50% in January 2023. Just saying rates haven't started going up 3 years ago.
Andrew! Great Job.
I really like this journalist, interesting topics explained well
missed the 4th option... if you can't increase payments cuz you're strapped.... or if you don't have money to make lump sum payment... or if you can't afford/qualify for the payment of a fixed rate mortgage... you're gonna have to sell your house..............................
As an old adage says "A borrower is a slave to the lender". Nothing has changed.
given today's increase and just the reality of our time, more people need to understand this. I was never interested in this before buying and now I am happy to have been educated.
'So, ...' You don't begin with 'So, ...' I expect housing to lose 95% of its value to come back in line with what most people actually earn, keep and can carry.
70 year mortgage?! Wtf
I wonder how much a 1 mil house will cost the person after paying it for 70 years lol
70 years to own the house?! might as well just RENT at this point...
😢
@@nunol1554 $10 million in interest probably ha
that's def an eyepopping number but it's also definitely NOT real. It's a hypothetical situation where the current situation stays exactly the same. The reality is, any mortgage will at most renew after 5 years and their principle will need to be spread over a new amortization. To make the math work, the borrower will need to up the payments by a lot but at that new level, it'll be a 25 or so remaining. Renewal is where rubber really hits the road for people, someone who hits their trigger rate and cannot afford to increase their payment to cover principle is likely unable to pay the new monthly on renewal.
Oh wow! How sobering! Thanks CBC, I suppose its at such a time that perhaps renting make sense...think of the high-risk mortgage holders with a renewal coming up in the next 12 months!!
Bank of Canada should reduce the interest rates only and only on Home Loans.
Thanks for this timely video Andrew! I checked my statements after this segment and found that with the latest hike in January, all of my payments were going to interest only.
Will be making a lump sum payment and speaking with the bank to see how much I have to increase my weekly payments to cover some principal.
Rather than focusing on grocery inflation, I would prefer if the senate helped with mortgage payments.
1% reduction on $1million mortgage saves more than 1% reduction on $1000 grocery bill.
Sounds criminal..
Buying a house is a liability nowadays. Do the math… numbers don’t lie but people do.
I was lucky enough to renew my mortgage just before the rate increase but now have my fingers crossed the rate will decrease by the time this term is up. In the meantime, I'm paying off as much as I can, as quickly as I can.
They announced they would be raising the rate from bottom of the barrel prices 6 months in advance. They publicized that after the meeting in January they would raise the rate. It wasnt a surprise. If you googled "When will interest rates go up", they had a dated meeting saying "We will raise interest rates after this meeting".
The way mortgage contracts work, is your not unduly punished for restarting it if interest rates have gone down since yours started, so absolutely everyone could have renewed their mortgage in that 6 month window and held that rate for 5 years without consequence.
To be fair, paying attention to that stuff takes energy.
We just renewed, and got lucky. Mortgage went up roughly $210 / month and I was expecting alot worse. Mortgage specialist predicts rates will stay high for at least another year and a half but its just a prediction. Im hearing alot of people are forced to refinance right now...
If existing mortgage owners can pay in 70 years, why newer home buyers are stress tested for 25 years. Anyway, As long as bank tries to not lose customer, rent and home price isn't coming down. Meaning inflation of rent and housing won't fall. If it doesn't, BoC needs interest rate hike. You can't fix economy without addressing all factors. Also, BoC not increasing will push CAD down, contributing to inflation. Your house may worth 1M, but if CAD loses value, your house does too
Mine is currently at 75 years amortization LOL
75 years to own the house?! might as well just RENT at this point...
Then you couldn’t afford what you bought, unfortunately.
We bought an affordable house when compared to our combined income with the goal of having it paid off in 10-12 years. Had it paid off in just over 11. Never had a variable rate mortgage on it either. We qualified for a purchase price of close to double what we bought our house for…but we ultimately valued our future freedom instead. Glad to be on the other side of that tunnel now!
how much is your Mortgage?
The best option for any mortgage holder would be to contact your financial advisor or mortgage specialist. Many of the details provided in this news cast are incorrect. There are many options available for both variable rate and fixed rate mortgages. There may be additional options available that can help to save money.
I feel like I'm in the dark. I have a variable rate mortgage, but my payments are automatically adjusted to keep the amortization period the same. I get notices from my lender about the new payment amount as the rates have been changed. This was the same with my old lender too. I've never heard of a fixed payment variable rate mortgage before.
I have the same thing as you. But some banks offer variable mortgage rates where the payment remains the same despite rate increases, it's only the interest and principal portions of the payment that are adjusted, so interest keeps going up until it reaches the full mortgage payment amount. When it surpasses it, that's when negative amortization kicks in and the principal balance starts going up over time.
@@MarginCall123 Holy sh*t thats terrible. You dont even know your being robbed.
Variable mortgage rates are how they "lower prices" by raising interest rates. They drive people into bankruptcy and that frees up the market which lowers prices by ruining whoever bet wrong. Its a form of gambling, essentially.
When I was negotiating a mortgage for my friend, the broker, who I dont want to disparage because they were great, asked "Now would you like a variable rate, the rates are lower than fixed", to which I laughed and said "Are you kidding me? I would be insane" to which they laughed for a second and said "Yea" before they could stop themselves.
Its horrifying they they didnt even tell you the fixed rate was an option.
Now we need to cap amortizations to 25 years for cmhc mortgages or 30 years for non-cmhc holders. If payments quadruple, so be it.
It's ridiculous the variable rates are higher than fixed rates. There is some serious suppression of true Govt of Canada bond yields happening - fixed mortgage rates should be 7.5% right now.
How is that ridiculous, it’s called a variable rate. You sign up with a better deal than the fixed at the time. Stop complaint that a variable rate varies
@@thegoathimself5612 I don't have a mortgage LOL. I am implying that fixed rates should always be priced higher than variable because it would correctly price the risk that interest rates could go higher on the variable. Think of it like an insurance policy on the fixed that people would pay a little more for to get the certainty of a fixed rate.
@@andrewmccoll1582 Why would you take a variable over a fixed rate mortgage when prime was only 0.25%? It's not going to be any less than that...surely people know the only way prime is going is up. The reality is, people are greedy and wanted a lower rate so they could buy more. The bank know this just like the bank knows that prime will drop because we are on the verge of an economic crisis. They want to incentivize the customer to take the option that makes the bank the most money in the long run. IE fixed. It's like a hedge.
My amortization went to 146 years, I basically had to double my payment.....then rising food prices....rising utilities.....rising oil.....
Scary predicament.
It’s not a Canadian problem, it’s an Ontario and BC problem. Most of the country is just fine, no silly bubbles / FOMO. BofC is wrong again, our dollar will plummet driving more inflation as they fall further behind the curve.
No sympathy for the debtors. I feel more sympathy for the savers that have been slaughtered by the artificial suppression of interest rates. I feel sorry for Canadians in Vancouver who can't afford homes and have to live in properties owned by absentee landlords.
There is very soft language here that doesn't make a lot of sense. For instance, where he says it made financial sense to go variable at rock-bottom rates as long as you can stomach the risk. And then says but then rates went up. That was the risk! I don't know who wrote that line but at rock bottom rates it makes increasingly more sense to go fixed because there is only so much room for the rate to go lower and the rate can only go up.
Also to say "you kind of agree to ride the interest rate rollercoaster". You don't "kind of", you explicitly agree that's basically the entire decision, it's not incidental. More soft language here, these are grown up decisions made by grown ups.
The last thing I'll mention is that he talks about higher risk-higher reward. The example used really doesn't make sense. As the rate lowers the risk profile of variable increases. The only reward for taking on that risk is the differential between the variable and the fixed. The reward is not proportionate to the risk level since the differential between variable and fixed fluctuates all the time. As an example, at the time of my mortgage in 2020, the difference was about 50 bp between fixed and variable. At a bit under 2%, the risk is very high that variable will move up compared to what it is now. The spread between fixed and variable is actually not all that different nowadays and so the reward is the same but now the risk profile of variable is counterintuitively lower.
This video does have some things correct but there is either some misunderstanding about how things work or perhaps they are being a bit soft on the variable rate holders.
All tied in with UNDRIP. All private land rights will be removed at some point. Article 26.
Federal election now!
Isnt it 6.7 right now?
Go with BNS. Don't Go With RBC - Worse (how do you feel grade 10 staff or non college degree is doing your paper works)
105% percent is allowed!. it shouldn't be allowed. it would have drastic problem down the road. 90% might be max. at the home owner could at least have a little bit left. and adjust their life style and expenses
I bet Dave Ramsey would like to speak with all of these lucky ducks and tell them to smarten up and stop living beyond their means!
#4 sell
And yet the historical long term average is 7 percent. RIP.
Back in 2019 when I renewed my mortage, I was given this flowery declaration that viariable rate is the best option. For the past 10 years prior to 2019, I have always had fixed rate so I decided to go variable for a change, if it's gonna help me financially. Pandemic hit and the rate went to almost 0% and I have to admit I benefitted from that rock bottom interest rate. Then mid 2022 to present, interest rate just dramatically increased that I am currently paying uncomfortably high amortization. I think the banks are trying to make up what they have lost at the onset of the pandemic (by lowering the interest rates early 2020 to hiking it now)??? I didn't go to school for this but my gut tells me so.
Banks never losses money!
Variable is a form of long term gambling, so if you go with it youll have to try to predict the banks actions.
Yea its not fair but definatly intentional that they dont teach this stuff in school.
Looks like it’s time to live elsewhere… 70 year mortgages lol I have no idea how Canada attracts immigrants… but bravo on the marketing department at the immigration ministry on selling false hopes and dreams 😂
The banks should investigate all these mortgages. Most of thes mortgages seems fraudulent as the mortgage fraud investigations have shown. Media has already shown it. Because of these our economy is sinking. What a pity for Canadians who are working hard to survive. By allowing these mortgages to pass the triger rate is against the law and against the principles of Capitalism. Who will save us now?
Honestly I guess its only because I have a small amount of credit card debt but like my interest payments are like nothing and its very easy to stay ahead of the interest payments at least for me but then my interest is 30$ or something lol.
It doesn’t take much logical thinking to realize that taking a variable rate over such a long period of time is suicide. The real estate market and the economy have always been cyclical. You are definitely going to experience the highs and low cycles over 20 to 30 years, so why on earth do it? If you need to take a variable rate because that’s all you can afford then you are buying a property priced out of your range and asking for future trouble.
Now tack in lower CAD value (because BoC didn't follow the US increase) plus already higher prices for goods and you end up with a perfect storm to eradicate the middle class.
The government must change their policies and regulations to allow people to have a longer-term mortgage amortization.
Does 100 sound okay to you?. But if you sign up for 100, within a year it will hit 200 due to inflation. That means you will be pay 80% of your paycheck on mortgage. You just pay interest for ever and not own the house. All these 35+ amortization doesn't really own house, they are just renting from Bank for more than what you will pay landlord
@Nagito Yup If interest rates come back down, then the borrower could then pay more of the principal and shorten the amortization. I am assuming this "high" interest rate won't last forever.
@@michaelngfinance High interest rates will last quite a long time 3-5 years. By that time Canadians will be more poor.
There is nothing good about extending amortization. You are paying more interest than principal.
Lmao this is not a new thing ride the roller coaster and u cry wen it hits the clime lol
if you bought a house to be a home, its not an issue
Yes it is.
What does that mean? Speculators are are suffering? No they're not!
Only if they bought a house they could afford...
You will own nothing, and you will be happy -Canada
1. Build apartments that have affordable rent.
2. Stop lending any new loans until all loans that are out get paid off.
... well at least the banks are making money off the money we had to borrow to live. I'll get back to servicing wealthy humans of the older generation. Fun game.
thank god they fixed inflation permanently and completely through their strong economic knowledge and prowess. we no longer have to worry about rate increases, inflation or unbridled economic spending. we can afford to give ukraine billions more now, and we should elevate these bankers to hero status, like fauci or trudeau and call their triumphs from the roof tops
Dramatic much? I know this may sound like foreign to some people but your house is your home not an ATM machine or for credit don't worry how much it may be worth month to month it's your home.
It’s one thing when you buy a house with a decent down payment where you have ~20% equity in it right off the bat, combined with affordable monthly payments. It’s another when you go in with the minimum, have the mortgage become unaffordable with the cost of everything else having risen, but are also now upside down as the value dropped. There, you’re trapped since even if you get out, you still owe money.
Gotta say…I’m really glad that we went into our first home with the goal of having it paid off in full within 10-12 years. Paid it off in around 11 years this past summer. Definitely feels great to be debt free now that the interest rates are rising!
@@DB-bw5fz Way to go!
Well thats not exactly how money works. Money is imaginary, more or less. It a promise of energy, not the energy itself.
So for example, banks only needs 10% of a holding to leverage a loan. So if you give them 100$, they can give up 90 as a loan. If that loan went to another bank. That bank could loan out like 78$ or whatever, and so on. This would effectively create hundreds of dollars of debt out of 100$. Creating a debt higher than money that exists.
My point being that while the house exists, the money is just a promise. So if you can take 100K out of your house, without selling it, and build a garage, and then sell that house for an extra 120k, your house almost literally built itself while you lived in it from your perspective. You made good on your promise and still lived in a house. To you, the garage only cost the interest payments until you sold it, unless you sold it for a bit more than it cost to make, in which case it was free. So the house actually gave you a thing for cheap or free by its existence alone. Not so much an atm as a wealth generator.
@@Elemblue2 Taking out existing equity in a home without the need to sell (HELOC, 2nd mortgage etc..) to purchase or build another asset that will ultimately increase in value seems like a good proposition. In fact, it is a good proposition as long as you have the means to make the necessary payments without any issues. As you said though, as long as the property value remains higher than the amount owed, the option to sell, pay off the debt in full and pocket the rest is always there.
The problem is that many people bought houses as the values were increasing rapidly, and then immediately took out the equity as it became available to make purchases that don’t add any value. Then, once the values drop a bit and the home is worth less than the amount owed, selling everything results in money still needing to be owed. Not an actual problem as long as the debt holder can continue making their payments until values recover. It’s the ones that were at the bleeding edge with no margin that ultimately will fall off the proverbial cliff.
Capitalism Prison