This article originally appeared on the BiggerPockets Forum.
I wanted to share something that has been going on in Canada, as I believe there are lessons for everyone, and I don’t think this gets coverage at all in the United States.
Interest rates have increased at the same crazy pace in Canada as in the U.S., but we are seeing unique negative consequences.
Mortgage Financing Is Different
In Canada, we do not have 30-year fixed mortgages. We have fixed mortgages that can be amortized for 30 years, but typically, we can only lock them in for a maximum of five years. Once that term is up, you have to renew at the current rate.
As this happens, people’s mortgage payments have gone up somewhere around 60% in the worst-case scenarios. Our housing prices are also insanely high.
We take adjustable rate mortgages at levels you would never see in the U.S. This happens because there are stiff penalties for breaking a fixed mortgage, where you owe all the missed interest to the bank. I do not believe the U.S. has these penalties, at least not in the same way. Going adjustable removes these penalties should you break an adjustable mortgage.
Adjustable rate mortgages add even more uncertainty
Somewhere around a third of mortgages are adjustable. People on these mortgages had their payments go up automatically with every interest rate increase and saw cash flow completely wiped out. I had one go from $771 to $1,250 per month. Luckily, I still cash flow.
In some of the adjustable products, the payment stays the same, but the principal-to-interest allocation changes to the point where…