As a homeowner you always need to stay up-to-date with the home borrowing process. In the US, if rates drop maybe you should refinance your loan, and if you do, is there a breakeven point you need to consider before refinancing? Mortgages in Canada are different from the mortgages in the US. In the US mortgages are attached to the property itself. Mortgages in Canada are attached to the borrower not the property itself. Canadian mortgages are portable and attached to the borrower not the property itself.
If you are moving from one property to the next, and it has a greater value than your current mortgage, you can get a second loan to cover the difference in value between the home you are leaving and its mortgage and the new property.
The typical Canadian mortgage is a 5 year term, amortized over a 25 year period. This means that there will still be a balance at the end of the 5 year loan period. The borrower will need to refinance and get a new loan at the current mortgage rate, which could be more or less than their current mortgage loan rate. Americans are used to being able to refinance, in effect paying off the mortgage early with no penalty. Canadians have steep prepayment penalties if the rates drop and someone wants to try and take advantage of the mortgage system to lower their payments.
There is a lot of talk about how some people view the increase in mortgage values in a few Canadian cities and liken it to the mortgage crisis in the US in 2008. Mortgages are handled very differently in each country. Some of these voices are quieted because of the belief that the Canadian market is more stable than the US market was due to the fact Canadians cant just walk away from their mortgage debt and house. Americans can foreclose, walk away, and the bank gets stuck with the house, and the debt cannot be collected from the homeowner if they file a bankruptcy. However in Canada, if you walk away from the home, you still have the debt associated with the home, just no longer have the home.
The average Canadian mortgage payment is up 4.6%, which is higher than inflation. This can cause alarm for some. How can home values rise faster than inflation? It’s a little lesson in economics. Supply and demand, if there is a shortage of a supply of homes and you have people trying to buy homes, that will drive the prices of the homes up, regardless of the nations inflation. We have the same problem in Sioux Falls, SD. The housing market did not crash here, like it did in 2008 for the rest of the US. Our unemployment rate is 2%, so we have lots of open jobs for people to move here.
I see out of state license plates everywhere, and we aren’t a popular tourist location, so I know these people are here for the jobs and are going to be looking for a place to live. People are moving from all over the country because they can get a job here. I bought my house for $179,000, and today I could probably sell it for $215,000. The houses on my street have all sold in less than 10 days. One of them sold in less than 2 days. So we have an abundance of buyers, not enough sellers so the prices on home sales are up.
Vancouver and Toronto have Chinese and Indian investors putting money into the cities and with zoning restrictions it creates a lower supply, whereas there is a higher demand. This will drive the prices up regardless of the national inflation. If you are a new homebuyer you might have a bit of competition to buy your first home, and maybe not all the necessary funds to make that first big purchase. As found on TheStar It’s said that as much as 20% of first time home buyers are receiving financial support from family.
This isn’t all too surprising, as boomers are moving closer to retirement and downsizing their homes and lifestyles, and their children are growing their families and needing bigger homes for themselves.
Is the housing market at risk because of the increase in mortgage prices, I would say no. The market was not regulated well in the US and they were giving homes to people unable to pay for them.
The property taxes were not assessed until after building new homes was complete in a neighborhood, then those families would be hit with a $200 or higher property tax bill per month, and many homeowners did not know this would be the case. Their budgets were only set for paying their mortgage, not the un-assessed taxes. This was sheer neglect on those selling those homes and financing them.
It was even taught in college finance classes, that home values always increase 1-3% every year, no matter what. This is insane to assume such a thing. I questioned my college professor in 2002, who dismissed my question as asinine because it had always increased. Canadian mortgages are only seeing higher than normal increases in several cities, not nationwide. Even if there was a crash it would probably only be in those cities, thus not taking down the entire nations mortgage infrastructure. As long as there is a demand and not enough supply, the prices will rise.
If supply is met, the demand will even out and the prices may go down, so if you bought during the high values, you may be in deep water, but hopefully it evens out over time rather than sinks. It might take a few Canadians down, but it’s common sense to buy low and sell high. Those who buy high, and always bound to get burned whether in the housing market or stock market.
