While short-term mortgages are the norm in Canada, long-term mortgages would offer a wealth of benefits to borrowers, lenders, and investors
Long-term mortgages are relatively uncommon in Canada. In fact, only 2% of mortgages issued in 2018 had fixed-rate loans with terms of over five years. But new research shows that opening Canada’s lending industry to longer-term mortgages could improve financial stability and flexibility for consumers.
In this blog post, we’ll break down the reason behind the widely accepted five-year term, the benefits that longer-term mortgages can offer, and the results of the C.D Howe Institute investigation, which details the steps we could take to encourage new, long-term mortgages in Canada.
The Five-Year Term
The five-year mortgage term is the norm in Canada because of the regulations set out in the 1985 Interest Act. The Act allows borrowers to redeem a mortgage after five years with a maximum of three months’ interest. Lenders often don’t offer terms longer than five years because of reinvestment risks associated with the Act. Lenders need to re-invest the prepaid amount to earn a return that equals the prepaid mortgage interest rate.
Benefits of Long-Term Mortgages
Last year, Stephen Poloz, a Bank of Canada governor, encouraged lenders to offer long-term mortgages. He explained that offering longer-term mortgages could reduce risks in the financial system and improve flexibility for investors and borrowers. He also explained that long-term mortgages could allow borrowers to accumulate home equity and access a variety of renewal deals.
Plus, longer-term mortgages usually enable lower monthly repayments and flexibility, as you can reduce your term if your circumstances change.
The C.D Howe Institute Study
In January 2020, market expert Michael Feldman carried out a study on behalf of the C.D Howe Institute. He investigated the financial stability benefits of long-term mortgages in Canada. Feldman notes that although residential mortgages are usually amortized over periods of 25–40 years, they usually have legal maturity dates of up to five years.
Feldman argues that increasing the availability and take-up of longer-term mortgages could enhance financial stability and expand consumer choice.
He suggests that the five-year mortgage is so embedded as a custom in Canada that only incentives or new legal policies can overturn this. He concludes that the government needs to make regulatory changes for long-term mortgages to become a stronger option for homebuyers.
The C.D Howe Institute Study Recommendations
- Revising the stress test so that borrowers can fix rates for terms longer than five years.
- Extending the redemption right in the Interest Act from five to 10 years.
- Amending the Interest Act to clarify borrowers’ redemption rights.
- Increasing covered bond limits to make it easier to fund uninsured mortgages.
- Developing private residential mortgage-backed securities (RMBS) to help lenders and borrowers to secure long-term mortgages. These securities would also help investors to seek long-term investment opportunities.
“Since the main purpose of the stress test is to predict the ability of borrowers to continue to service their mortgages if they must renew at maturity at a higher interest rate, it would be logical to loosen the stress test for borrowers willing to fix their rates for terms longer than five years,” Feldman said.
Plus, lengthening the redemption right “would greatly reduce or eliminate the premium that a lender would have to charge for its reinvestment risk on mortgages up to 10 years. A reduction in this pricing premium would be expected to lead to more 10-year mortgages.”
For more information, read the complete C.D Howe Institute report on the benefits of long-term mortgages.
Advice on Long-Term Mortgages
The current housing climate means that it can be difficult to get a longer-term mortgage. If you’re hoping to secure a long-term mortgage, you can get in touch with Storey Collective to seek advice from our team of specialist real estate agents.
Book a free 15-minute consultation to discuss your options.