Michael Feldman has radical idea: Revising the Interest Act.
The partner at Torys LLP says that the current mortgage system in Canada protects neither borrowers nor lenders the way it should. Residential mortgages most often come with five-year terms and 25-year amortizations, and as a result balloon payments hang in the balance on the last day. Feldman proposes jettisoning balloon payments altogether.
“Right now, the Interest Act allows a right to pay off the mortgage every five years. If the government would be willing to consider revising that section, they might also consider extending the five years to up to 10 years; that way you’d have longer-term mortgages and lenders would offer longer-term mortgages at better rates if they didn’t have prepayment risk,” Feldman told Mortgagebrokernews.ca.
Feldman discusses his idea at length in a report called The Case for Longer Mortgages: Addressing the Mismatch between Term and Amortization.
If mortgages didn’t come due every five years, but borrowers could still reset interest rates—and if the parties couldn’t agree on a rate, the mortgage could become subject to a floating rate—Feldman says Canadians would have an easier time making their payments. Should a lender ever go out of business, a borrower wouldn’t be able to renew the mortgage and it would come due. While they could secure a mortgage from another lender, there are no guarantees, especially if real estate values plummet or if lending rules change, as they’re wont to in Canada.
“Losing a house is not good for anyone—it’s not good for the borrower and it’s not good for the lender, or the bank of the lender, because they’ll probably have a loss and sell the property,” said Feldman. “Or put another way, if it was a good mortgage they’d be able to refinance it, and if they can’t it means the lender or creditor of the lender takes a loss. It all comes up because we have an unusual mortgage product in Canada that says every five years your mortgage is due.”
Feldman’s report posits that long-term mortgages would abet the creation of a market for Residential Mortgage-Backed Securities for uninsured mortgages wherein institutional investors could fund uninsured mortgages.
He also says it would create more competition.
“It would allow smaller mortgage lenders to potentially access the private RMBS market as a means for funding their business. Right now with the mortgage product we have, rating agencies and investors are concerned about the balloon risk, but you can deal with the balloon risk by changing the terms of the mortgage so that it doesn’t actually have a legal maturity every five years and a required balloon payment every five years.”