30-year Mortgage Analysis? Forget it!

The Trudeau government is not keen on allowing longer-term mortgages to be offered for up to 30 years. At a Canadian Home Builders Association event in southern Ontario on Thursday morning, the Premier said he preferred an approach that will not “disrupt the market unexpectedly.”

It seems to be closing as the industry hopes to reinvigorate some markets where sales have slowed significantly, particularly in Toronto and Vancouver. For example, according to the Greater Vancouver Real Estate Board, home sales in April were 43.1% below the 10-year average of sales in the region.

The Governor of the Bank of Canada made a plea earlier this week in Winnipeg for long-term mortgages. Stephen Poloz did not specifically talk about loans over a 30- or 35-year amortization period rather than 25 years, as is currently the case. But he raised the possibility of encouraging Canadians to enter into mortgage contracts that exceed a five-year term.

“The calculation is simple,” said Stephen Poloz: “About 20% of all 5-year mortgages are renewed each year. This represents a large number of households. If all mortgages were 10 years, only 10% of these homeowners would renew their loans each year. »

Reducing risk
From the perspective of the public policymaker, the Bank of Canada, Stephen Poloz believes that longer-term loans would contribute “to the security of the financial system and to the stability of the economy.”

For the consumer, “this type of loan reduces the risk of renewing at a higher interest rate.” And then, for an owner, Governor Poloz says it allows him to “further increase the net worth of his property between renewals.”

Prime Minister Trudeau, for his part, acknowledges that a 30-year mortgage amortization period has some benefits for borrowers. “Yes, it can reduce monthly mortgage payments,” Trudeau said. But overall, it increases the amount you’re going to pay in interest. »

And so, he prefers to highlight the program that his government announced in Finance Minister Bill Morneau’s March 19 budget, which relies more on risk sharing between borrowers and lenders. This is an interest-free CMHC mortgage representing 5% to 10% of the purchase price of a home. This amount is in addition to the down payment and reduces the mortgage to the bank.

“For example, it says in the budget, if a borrower buys a $400,000 home with a 5% down payment and a CMHC-participating mortgage of 5% ($20,000), the amount of the borrower’s insured mortgage would be reduced, from $380,000 to $360,000, allowing it to reduce its monthly mortgage bill. »

Redefining risk sharing
It is important to understand that the challenge, in the end, is to maintain a healthy real estate market, to promote access to the property, without adding to the debt and dangers associated with it.

Stephen Poloz made it clear that it is worth pursuing new mortgage initiatives like the one unveiled in the budget:

“This type of mortgage, of which there are many possible variants, has been thoroughly analyzed by two American economists: Atif Mian and Amir Sufi. Essentially, Poloz said, the idea is to redefine the risk-sharing of a mortgage between the borrower and the lender. Because the loan is shared, like a company’s shares, so are the risks. Of course, a joint mortgage does not eliminate the risks. The important thing to remember is that lenders are better placed than borrowers to bear the risk because they can diversify their risk among many borrowers. Borrowers are willing to pay to reduce risk, either by accepting a higher interest rate or by sharing their capital gains or losses with their lender. In the case of Canada, which has high standards for underwriting mortgages, this redistribution of risk would likely make the financial system safer in the end. »

The federal government also announced an increase in the homeownership plan withdrawal limit from $25,000 to $35,000. These are measured initiatives to stimulate the market, which seem more prudent than increasing the amortization period to 30 years. What for? Because Canadians have a high level of debt, we have talked about it a lot.

According to Statistics Canada, at the end of 2018, the average household debt in the credit market represented 174% of their disposable income. In other words, for every $100 of disposable income, households have a debt of $174.

This debt ratio is constantly rising. It increased from 100 to 150 percent from 1997 to 2009, then to 160 percent in 2013, and to more than 170 percent in 2016. Debt in the consumer credit and mortgage market, relative to household net worth, has also increased in recent decades. It declined slightly after 2012 but remains higher than it was 20 years ago.