Bank of Canada Governor Stephen Poloz has some new ideas about how to make the country’s financial system safer. One of them is to give Canadians more flexible mortgage options, such as longer fixed-rate mortgages.
“There are compelling reasons why it would be helpful to make more use of longer-duration mortgages,” he said in a speech to the Canadian Credit Union Association and Winnipeg Chamber of Commerce on Monday.
A longer term could make homeownership more affordable for consumers, as they would renew at a higher rate less often. Nearly half (45 per cent) of all mortgage loans are a five-year, fixed-rate term, Poloz noted in his speech. However, only two per cent of mortgage loans in 2018 were fixed-rate with a term longer than five years.
The reason so many Canadians opt for a shorter mortgage term is because the rates are significantly lower. For a 10-year fixed-rate mortgage, interest rates can range from 0.4 to one per cent higher than a five-year term, the Globe and Mail reports. And for a 25-year term, the rates could be an additional five points higher.
While Poloz recognized this higher price point, he argued that “some homebuyers may be willing to pay more to lower their risk.”
“And a longer-term mortgage might not be much more expensive in the long run depending on the details of the loan and the prepayment penalties that apply,” he added. “At a minimum, we could do more to make people aware of the longer-term options that are available—many people I talk to do not know that longer-term mortgages exist.”
Additionally, longer terms could help create a more stable economy, thus benefiting policy-makers, Poloz said.
The Bank of Canada governor also proposed creating a private mortgage-based securities market and launching shared-equity mortgages for first-time home buyers to further lower risk in the financial system.
Although the housing market has slowed, Poloz believes it will “return to normal growth” later this year. Previously, rising interest rates and the mortgage stress test significantly impacted housing sales. However, rates have held steady for the past four months, and more consumers are reportedly waiting for prices to drop before buying a home.