Yahoo Finance Canada Should Boost Mortgages With Longer Terms, Desjardins Says
(Bloomberg) -- Canada should take steps to introduce more mortgages with longer renewal terms, according to the country’s largest financial co-operative.
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More mortgage options, specifically those with 10-year terms, would help contain “payment shocks” faced by households when they renew their debt obligations after interest rates have increased, according to a report released Monday by Desjardins.
That would also lower the economy’s sensitivity to higher borrowing costs, and likely reduce the need for the now-widespread use of so-called “negative amortization” fixed-payment variable products, which the country’s bank watchdog and the Bank of Canada have flagged as a concern.
Homebuyers in Canada have long shunned mortgages that fix rates for a decade because they’re much more expensive. “If the option to lock in 10‑year mortgage terms had been more prevalent and attractive, the payment shock would have been more manageable for households opting for it,” Chief Economist Jimmy Jean and Macro Strategist Tiago Figueiredo say in the report.
Canada’s mortgage market is dominated by shorter-term duration contracts that roll over after five years or less. That’s in stark contrast with the US, where 30-year mortgages are commonplace.
That means options are limited for Canadian households seeking to protect themselves from sharp rises in interest rates. Canadians are spending larger chunks of their income servicing their debt burden than in many other countries amid the global spike in borrowing costs, the authors argue.
Part of the reason shorter-term mortgage options have become widespread in Canada is due to persistent decreases in interest rates in the 40 years prior to the pandemic, according to the report. Households had an incentive to sign mortgages on which the rates reset more frequently.
Read More: Bank of Canada’s Rogers Urges Shift by Banks on Mortgage Lending
In an interview, Jean outlined steps that would help expand the availability of 10-year terms and make them less costly for consumers. Legislation should be adjusted to limit the existing restrictions around prepayment penalties for loans of longer than five years, he said.
To help on the funding side, the country should develop a “private label” residential mortgage-backed securities market, and allow more covered bonds to be issued.
“If conditions are made ripe for the development of that market, competitive pressures will naturally bring lenders in that direction,” Jean said. “It’s also in their interest by way of managing risks in their mortgage books.”
The Bank of Canada says about half of all outstanding mortgages have rolled over at higher rates since the beginning of 2022. Before the pandemic, the central bank had started to explore the mortgage innovation question, but the initiative has stalled even though it’s more critical than ever, the Desjardins authors argue.
Some lenders in Canada have found creative ways to help borrowers with variable rate mortgages who might struggle with higher payments — allowing them to tack unpaid interest onto their mortgage’s principal, or allowing interest-only payments.
“The Canadian government is now in a position of having to urge lenders to show leniency toward borrowers facing mortgage renewal shocks,” the authors say in the report. “This plea might have been unnecessary if better products had existed in the first place.”
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