Bank of Canada Governor Stephen Poloz yesterday proclaimed that lenders should encourage mortgage products with longer terms as a means of evenly distributing risk and insulating the financing system.
It would also grow Canada’s mortgage-backed securities market.
“I know mortgage-backed security is a bit of a swear word in Canada, particularly because of the recession in the U.S., but the fact is we’ve been doing mortgage-backed securities in Canada for at least 20 years and, really, what Poloz is trying to do is open up Canada’s market so it isn’t always institutional or crown corporations buying them,” said Benjamin Sammut, senior sales manager and foreign capital specialist for Ebury.
“The way you get mortgage involvement for an MBS market in Canada is by increasing product offerings. Canada is notoriously short for long-term mortgages, and with a larger product offering it would create more demand for Canadian mortgage-backed securities, as well as spread the risk and create a safer structure for the Canadian mortgage space.”
Long-term mortgages of up to 10 years aren’t the only way to grow an MBS market in Canada, but Sammut believes it would nevertheless be a step in the right direction.
“A market with balanced risk is always better and this is a great tool to achieve that,” he said. “The other side of the coin is you have to focus on Canada’s insanely high consumer debt levels. While it isn’t popular having a 10-year fixed mortgage, with budgeting it’s a good thing for people trying to figure out their financing.”
In 2016, 29.6% of Canadians were debt-free—a number that climbs to 58% for people aged 65 and older—but it also indicates that debt is concentrated among fewer people.
“Those are the types of people who are further along in years, income and consumer habits,” continued Sammut, “and they’re perfect candidates for the longest mortgage terms because this may be the last, or second-last, mortgage they take. From a consumer perspective, not just making the market safer, but easing debt burden and helping the average consumer is a good option to have.”
Lenders are chary about propagating the advantages of long-term mortgages because they don’t want to be exposed to the market for that long, but Sammut says that the MBS market would free capital for long-term mortgage loans, which banks would then price aggressively.
But is a long-term mortgage really the best thing for consumers? Elan Weintraub doesn’t think so.
“Historically, seven- and 10-year terms have higher interest rates, and for many people their income goes up over time, so it’s better to have a lower rate and lower payment without tying yourself up,” said the broker and director of Mortgage Outlet. “What I recommend to my clients is taking a five-year term and increasing their payments as if the interest rate was the same as on a 10-year term. If the five-year rate is 3.95% and the 10-year rate is 4.95%, that money goes directly to their principal.”
It’s also unlikely borrowers’ lives will remain static for enough to warrant a decade-long commitment.
“Things change so quickly nowadays that it’s difficult for a person to predict they’d be in the same mortgage for 10 years and not get married, have no job change, no change of city, not refinance to pay off debt, not refinance to buy an investment, not refinance to buy a cottage,” said Weintraub. “The probably of that is pretty low. The benefit of five years is you can start over and look at all your options again.”