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0 pointsghaff3y ago0 comments

Which, as an American, seems wild. How many people are prepared to have their mortgage go up 2x to 3x just a few years--which doesn't even require an increase to especially outrageous rates from historically low interest rates?

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Tiktaalik3y ago

Variable rates are bad in those rare years where rates spike upwards, but the data shows that in general, variable rate mortgages are more affordable than fixed rate mortgages (which are a premium), which is why they're pretty popular.

The thing that makes them not painful in bad times is that often the payments stay fixed, and the extra interest is tacked onto the end (meaning that you are gaining more to pay). (you can get a mortgage where the payments do immediately change as the rate changes)

That being said it is possible to hit the "trigger rate" where your fixed monthly payments are no longer even covering interest alone, and then the bank will give you a call to make your payments go up.

ghaffOP3y ago

(In the US), the thing with fixed rate mortgages is that they're predictable which has a lot of value too even if you could do better with ARM if things align. And if rates go down--not that that was likely over the past at least 10 or so years, you could always refinance to a lower rate. I did have a home equity line of credit for a while--which was variable--but fortunately during a pretty low interest rate period.

allannienhuis3y ago

I suspect many homeowners with a bit of equity would adjust their ammortization period to keep their payments affordable, and then re-adjust it again if rates drop a few years later. When it's time to renew your mortgage you usually have quite a bit of flexibilty.

The people that get hurt the most with increasing interest rates are new home buyers with high-ratio loans, with their amortization already at the maximum. There are definitely some people who get caught in that squeeze and are forced to downsize or right out of the market by those conditions.

jemmyw3y ago

Banks are supposed to stress test customers to that kind of rate. Not sure how successful that is. I know we thought about it and moved pretty far out in order to afford the home we wanted without stretching our budget to the limit. Most of our peers stretched themselves to the absolute limit they could afford.

refurb3y ago

The problem is that interest rates have been on a long, slow downward trend for almost 30 years in Canada. Anyone less than 50 years old hasn't be around in a rapidly increasing interest rate environment.

It's very common to always go with a floating variable mortgage and for the past 3 decades it's been the clear winner to locking in a rate for 3-5 years.

It also explains why last year the average sale price of a Canadian house was double that of the US. Let that sink in, in a country with higher taxes, lower wages and variable mortgages...the price is double.

It should be the other way around. You'd expect the US to be the same or maybe a small premium to Canadian home prices.

zinckiwi3y ago

As another commenter said, no choice. That's just how it works. Conversely, we're confused why banks in the US are willing to do a 30-year fix in the first place. That's an awfully long time into an unknown future to commit to anything, especially in an industry so conservative and ruthless as banking.

dbetteridge3y ago

Well it's not like you have a choice...

Most banks will give 5 years fixed at maximum and the interest rates were always higher than variable.

Most people signing for the variable rates didn't expect this sort of massive increase within a year, given its been fairly low for a decade.

bombcar3y ago

It's somewhere between US fixed-loan buying and month-to-month renting. It can go up but you can plan for that, basically by buying less house than "the maximum".

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