Canada’s federal mortgage insurer is not in favour of extending the maximum amortization period for new mortgages, arguing that measures to cut monthly payments would also stoke demand and spur higher home prices.
Currently, borrowers have a maximum of 25 years to pay down their mortgage if they make a down payment of less than 20 per cent of the property’s purchase price. They are also required to pay for mortgage insurance, which protects banks from losses if borrowers are unable to pay their mortgage.
Although some borrowers with variable-rate mortgages have seen their amortizations temporarily grow beyond 25 years as interest rates have risen, Canada Mortgage and Housing Corp. chief executive Romy Bowers says she is not looking to make expanded mortgage terms a permanent feature for new buyers.
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“It’s better to focus on increasing the supply versus making it easier for people to borrow more money,” Ms. Bowers told The Globe and Mail. “We feel, from a policy perspective, it’s probably not the best move in a supply constrained environment.”
Ms. Bowers said increasing the amortization period for insured mortgages would create more demand for housing and increase the purchasing power of individuals, which would just get “capitalized into the cost of housing.”
The maximum amortization period is 30 years for a borrower who makes a minimum 20-per-cent down payment on the purchase price of their property.
For years, the Trudeau government has tried to make it easier for first-time homebuyers to purchase property. It has introduced tax incentives and government loan programs, but has shied away from extending the amortization period – the length of time it takes to pay down a mortgage.
However, over the past year, as the Bank of Canada hiked its benchmark interest rate to 4.5 per cent from 0.25 per cent, most borrowers with an existing variable-rate mortgage have had their amortization period automatically extended. That is because most variable-rate borrowers have fixed monthly payments and when interest rates increased, a higher portion of their monthly payment went toward interest and less toward principal reduction.
As a result, many variable-rate borrowers had to either increase their monthly payment or had their amortization period extended well beyond 30 years.
As of the end of January, many of the country’s big banks had a large chunk of their residential loan portfolios with amortization periods of more than 30 years. A year ago, when the central bank’s benchmark interest rate was still 0.25 per cent, amortization periods remained below 30 years.
Ms. Bowers said CMHC is managing risks associated with lengthening amortizations and said those extended insured loans represented a tiny fraction of the agency’s portfolio. She said CMHC is in constant talk with lenders, who have been reaching out to borrowers to see if they can handle higher monthly payments.
The most recent data show that the mortgage arrears rate for Canadian banks was 0.15 per cent in February. Ms. Bowers said losses typically arise from unemployment, rather than the shock of higher interest rates.
CMHC’s fourth-quarter financial results show that a growing share of its insurance is covering homes for which the loans are close to underwater, or are already. Ms. Bowers said that has occurred because of the recent drop in home prices, and not because homeowners are adding higher interest payments to the size of their original loan.