5 ms·

The situation is actually even worse than this. In Canada, they don't have fixed 30-year mortgages like in the US. They have 25-year mortgages with 5 year ter

The situation is actually even worse than this. In Canada, they don't have fixed 30-year mortgages like in the US. They have 25-year mortgages with 5 year terms. They need to refinance within 5 years. If they take a 20-30% hit in the house costs, they will absolutely be unable to renew their mortgage, unless they come up with the cash to make up the difference in appraised value. This will lead to a lot of forced selling or foreclosures which will only pull the house prices down further, and cause more forced selling.

MarkMc 10y ago
What are 25-year mortgages with 5 year terms? Do you mean the interest rate is fixed for only five years? If so, people will not need to refinance as long as interest rates stay low.
- querulous 10y ago
  the interest rate is fixed for 3-5 years usually, yes even if interest rates are flat (or go down, even) you can still be forced into foreclosure if your equity in the home drops below an acceptable threshold
- refurb 10y ago
  It means the mortgage is based on a 25 year repayment schedule, but the money is only lent for 5 years at a time. After the 5 years are up, you need to pay back all the remaining principle. That's usually done by taking out a new 5 year mortgage.
  - CamperBob2 10y ago
    Wow, that's utterly terrifying.
    - refurb 10y ago
      It's how it's been done in Canada for the last century. Normally interest rates don't change that drastically and if they do go up it's due to inflation which is usually reflected in a salary increase. What would be really terrifying would be another period of stagflation (no growth, high inflation). You could see your salary stay the same, but your mortgage payments increase by 20-40% when you refinance.
      - CamperBob2 10y ago
        Can they deny an existing homeowner a mortgage? In the US, getting a mortgage is often a convoluted process that takes weeks of effort to put together and can fall apart at any time.
        jdkenney 10y ago
        Yes, it is possible, but more often the homeowner switches lenders themselves, since they are now able to negotiate for a better rate from a competitor. The truly terrifying thing is that the banks have been adding clauses to the mortgages that on renewal if the market value drops below the outstanding balance, the homeowner is required to pay the difference in order to renew. This is scary because they will not have paid off much in the first 5 years, but the house price can certainly drop a lot in 5 years in a down market, and there would be very little hope for finding a new lender willing to offer a new mortgage for more than the market value of the house. Getting a mortgage in Canada is (in my experience) a very weird process for an agreement over such a large sum, but typically can happen within a week.
      - MarkMc 10y ago
        Wow, that's basically a 5-year loan. I'm surprised that Canadian home buyers accept such risk. I wonder why the mortgage market in Australia and UK is so different to Canada.
- dragonwriter 10y ago
  I think it means amortized over 25 years, balance due and payable in 5, meaning you make payments like it was a 25 year mortgage, but after 5 have to pay it off (often, as GP points out, by refinancing.)
smsm42 10y ago
That is extremely bad deal if you have to essentially re-apply for the mortgage every 5 years. I then wonder why nobody offers much better fixed 30yr there? Regulations?
- kasey_junk 10y ago
  30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.
  - vmarsy 10y ago
    what rates of those fixed mortgages do these subsidies provide on average? To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough. Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.
    - kasey_junk 10y ago
      Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15. In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.
  - nl 10y ago
    Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan. My understanding is that is pretty similar to the US, but it sounds different to Canada. We don't have the same tax breaks as in the US though.
    - refurb 10y ago
      In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years. It's really quite amazing if you think about it. I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free. If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.

MarkMc 10y ago

What are 25-year mortgages with 5 year terms? Do you mean the interest rate is fixed for only five years? If so, people will not need to refinance as long as interest rates stay low.

querulous 10y ago
the interest rate is fixed for 3-5 years usually, yes even if interest rates are flat (or go down, even) you can still be forced into foreclosure if your equity in the home drops below an acceptable threshold
refurb 10y ago
It means the mortgage is based on a 25 year repayment schedule, but the money is only lent for 5 years at a time. After the 5 years are up, you need to pay back all the remaining principle. That's usually done by taking out a new 5 year mortgage.
- CamperBob2 10y ago
  Wow, that's utterly terrifying.
  - refurb 10y ago
    It's how it's been done in Canada for the last century. Normally interest rates don't change that drastically and if they do go up it's due to inflation which is usually reflected in a salary increase. What would be really terrifying would be another period of stagflation (no growth, high inflation). You could see your salary stay the same, but your mortgage payments increase by 20-40% when you refinance.
    - CamperBob2 10y ago
      Can they deny an existing homeowner a mortgage? In the US, getting a mortgage is often a convoluted process that takes weeks of effort to put together and can fall apart at any time.
      - jdkenney 10y ago
        Yes, it is possible, but more often the homeowner switches lenders themselves, since they are now able to negotiate for a better rate from a competitor. The truly terrifying thing is that the banks have been adding clauses to the mortgages that on renewal if the market value drops below the outstanding balance, the homeowner is required to pay the difference in order to renew. This is scary because they will not have paid off much in the first 5 years, but the house price can certainly drop a lot in 5 years in a down market, and there would be very little hope for finding a new lender willing to offer a new mortgage for more than the market value of the house. Getting a mortgage in Canada is (in my experience) a very weird process for an agreement over such a large sum, but typically can happen within a week.
    - MarkMc 10y ago
      Wow, that's basically a 5-year loan. I'm surprised that Canadian home buyers accept such risk. I wonder why the mortgage market in Australia and UK is so different to Canada.
dragonwriter 10y ago
I think it means amortized over 25 years, balance due and payable in 5, meaning you make payments like it was a 25 year mortgage, but after 5 have to pay it off (often, as GP points out, by refinancing.)

smsm42 10y ago

That is extremely bad deal if you have to essentially re-apply for the mortgage every 5 years. I then wonder why nobody offers much better fixed 30yr there? Regulations?

kasey_junk 10y ago
30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.
- vmarsy 10y ago
  what rates of those fixed mortgages do these subsidies provide on average? To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough. Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.
  - kasey_junk 10y ago
    Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15. In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.
- nl 10y ago
  Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan. My understanding is that is pretty similar to the US, but it sounds different to Canada. We don't have the same tax breaks as in the US though.
  - refurb 10y ago
    In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years. It's really quite amazing if you think about it. I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free. If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.