The Coming Calamity in Canadian Mortgages

Dr. Robert P. Murphy
September 21, 2023
Interest Rates, Credit, Life Insurance, Whole Life Insurance, Mortgage Rates
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Rising interest rates have unleashed a coming wave of pain for Canadians with existing mortgages. Absent a major reversal, over the next few years, most Canadian mortgage holders will see (or have already experienced) a drastic surge in their monthly payments. Coupled with my prediction of a bad US recession hitting by 2024 that will depress housing prices, Canadian homeowners could be placed in an untenable position. Fortunately, my colleagues at infineo have developed a program to assist qualifying Canadians in paying off their conventional mortgage years or even decades ahead of schedule.

The Difference Between the Canadian and US Residential Mortgage Markets

Before diving into the numbers, I should first sketch the major differences between the US and Canadian mortgage markets. In the US, the norm is for homebuyers to take out 30-year fixed-rate mortgages. In particular, the amortization period and the term of the mortgage are always the same; if you make your “housing payments” according to the schedule, when the mortgage term ends, your house is paid off.

In contrast, in the Canadian market, the amortization period for mortgages on a new house is usually 25 years or shorter. But more striking is that within the amortization period, there is a sequence of shorter-term mortgages that periodically mature.

For example, a new homebuyer might buy a house for $400,000 with a 20-year amortization period but an initial 5-year mortgage at a fixed 6.5%. Assuming a $40,000 down payment, the loan amount is $360,000. On these terms, the monthly payment works out to $2,684. After the first five years, about $52,000 of the initial principal would have been extinguished, with the remaining (60 x $2,684) = $161,040 in total payments going to interest.

At the end of the initial 5-year term, our hypothetical Canadian homeowner could either pay off the balance on the mortgage of roughly $308,000 or — what’s more typical — renegotiate a new mortgage with either the same lender or a different one. Even if the original 5-year mortgage were a fixed-rate variety, that in no way “locks in” the rate on the new mortgage to be issued at the 5-year mark.

This all sounds very strange to the typical US reader, who may have assumed that 30-year fixed-rate mortgages were the norm worldwide. The closest analog Americans have to the Canadian market is adjustable rate mortgages (or ARMs), which caught many by surprise during the housing bubble’s collapse in 2007 and ’08.

Canadian Mortgage Rates Are Surging

Just as the Federal Reserve is doing in the US, the Bank of Canada has been raising its policy rate to curb price inflation, and as of this writing, the latest numbers may elicit another hike. This credit tightening has spilled into the mortgage market, with rates surging rapidly to 20-year highs:

As the chart indicates, 1-, 3-, and 5-year mortgage rates are now the highest they’ve been in the last two decades. More troubling, their rapid ascent is far steeper than their last runup. Furthermore, the last time mortgage rates rose like this (though not even as aggressively), it ushered in the global financial crisis of 2008.

US Poised for Major Recession

Even if we considered Canadian mortgage rates in a vacuum, it would spell pain for homeowners whose mortgages have recently matured or will do so over the next couple of years. As the chart above shows, depending on the specifics, many Canadians will likely see their basic rate doubling or even tripling. Now, because they would have paid down some of their principal, the overall monthly payment won’t adjust in the same proportion, but nonetheless, this will be a huge blow to many homeowners.

In a normal economy, one solution would be to either sell the house outright or to move into a more modest dwelling and rent out the property to occupants with a higher income. Of course, since many people will be trying those methods, there will be strong downward pressure on Canadian home prices. (Looked at from the other direction, for given “fundamentals” of rental prices for properties of certain characteristics, a higher mortgage rate implies a lower present value of the properties.)

But alas, Canadians likely won’t enjoy a “normal economy” in the coming year. For various reasons (especially the yield curve, which hasn’t been this inverted since the late 1970s), I think the US — and, by extension, the Canadian — economy is in store for a bad recession beginning in 2024. This will put further downward pressure on home prices, taking away options from Canadians trapped by the sudden jump in their mortgage rate.

The infineo Mortgage Minimizer

Fortunately, my colleagues and I at infineo are launching a new webinar series to explain our Mortgage Minimizer program, which uses a combination of a HELOC and properly structured Whole Life insurance policy to help Canadians rapidly pay off their existing mortgage, as well as knocking out other external debts (such as credit cards and car loans).

This program makes sense in any economic environment, but it is particularly compelling given the current situation in Canada. For more details, I refer interested readers to sign up for the next available webinar.

NOTE: This article was released 24 hours earlier on the IBC Infinite Banking Users Group on Facebook.

Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.

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