Homeowners Hit With 90-Year Mortgages As Interest Rates Surge

Some homeowners are seeing mortgage periods rise from the typical 25 years to timespans as high as 90 years amid skyrocketing interest rates.

Mortgage experts say they’ve recently seen amortization periods—the length of time it takes to pay off a mortgage in full—in Canada go as high as 60, 70 and even 90 years for homeowners who have variable-rate loans, but fixed monthly payments.

Borrowers with these kinds of variable-rate, fixed-payment mortgages pay the same amount every month. But interest rate hikes have eaten away at the amount those payments go towards paying off the loan. Instead, a larger percent of the monthly payment goes to interest (the cost of borrowing the mortgage) instead of principal (the amount borrowed from the lender).

“Interest rates have risen so much that the only way to keep the monthly payment unchanged [for those borrowers] is to extend the loan’s amortization period,” Holden Lewis, a home and mortgage expert at personal finance company NerdWallet, told Newsweek.

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In an effort to combat stubborn inflation, central banks around the world have continued to make it more expensive for borrowers to take out loans. The Federal Reserve, which has raised rates 10 times since March 2022, has signaled that it is coming towards the end of its current monetary policy.

But on July 10, Fed officials said the bank still needs to increase rates this year to bring inflation back down to its goal of two percent. The U.S. inflation rate sits at 2.97 percent as of June 30.

Which Banks Offer a 90-Year Mortgage?

The reason some Canadian homeowners are seeing 90-year amortization periods isn’t because lenders are offering a longer mortgage, but because the system automatically changes to lengthen the time period based on the fixed monthly payments.

The prime rate in Canada has risen from 2.45 percent to 6.95 percent between March 2022 and June 2023. A borrower absorbing the interest rate hikes would be seeing a $1,274 increase in monthly payments, according to an analysis by Ratehub, a finance website allowing users to compare Canadian mortgages. But borrowers with a variable-rate, fixed-payment mortgage are able to defer the financial impact of rising interest rates.

David Stevens, the former CEO of the Mortgage Bankers Association (MBA) and a former Federal Housing Administration commissioner during the Obama administration, told Newsweek that while the fixed monthly payment option may seem attractive, “longer-term loans are definitely more risky for lenders and borrowers.”

The problem is that keeping their fixed monthly payments means a borrower with a variable-rate loan could pay as much as $1.67 million more in interest than a homeowner who is facing the interest rate hikes head on. Ratehub’s calculations shows that the total interest paid by a borrower with a 25-year mortgage costs $448,196, compared to the $2,124,469 that a borrower with a 90-year mortgage would have to pay.

Longer-term loans are also an issue for risk managers, who often worry about a loan not building equity quickly enough. Take a $300,000 loan with a 7 percent interest, for example. After 10 full years of payment, the balance on a 30-year mortgage would drop $42,500. On a 70-year mortgage, however, that same 10 years of payment would only bring the balance down by $2,305.

“With the average homeowner owning their home less than 10 years, the inability to build equity may trap that homeowner in their house if they need to sell their home but may not have enough money to pay all the fees to sell a home,” Stevens said.

What Happens to American Homeowners?

“Every country structures mortgages differently,” Lewis said. For Americans, mortgages in the U.S. don’t have the option for variable payoff periods like some in Canada do.

“In the States, if you get a loan with a 30-year term, the lender can’t stretch that out because of higher mortgage rates,” Lewis said. “That’s the case even for adjustable-rate mortgages: An ARM’s interest rate and monthly payment can go up or down, but the final payoff date never extends farther into the future.”

Stevens said that with over 70 percent of U.S. home loans going through Congress‘ home mortgage companies, Fannie Mae and Freddie Mac, or securities from the Government National Mortgage Association, “there is no way to introduce longer term loans.”

On top of that, the Dodd-Frank Act, which overhauled financial regulation in the wake of the 2008 recession and which was enacted in 2010, explicitly outlawed interest-only loans from being eligible as qualified mortgage loans. So while it is possible for a homeowner to get a variable-rate loan in the U.S., it would have to be a non-qualified mortgage private label security, which has significantly higher interest rates that would diminish any benefit that a longer-term loan could provide, Stevens said.

The bottom line, as Lewis said, is that the 90-year mortgages some Canadian homeowners are struggling with is “a confusing and distressing situation that doesn’t happen in the United States.”