Note to CMHC: extended amortizations help mitigate mortgage risks

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Robert McLister: Allow renewed mortgage loans to be repaid longer after extreme interest rate hike cycles

Published June 21, 2024Last updated 2 hours ago4 minutes reading time

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A person walks past a row of houses in Toronto.A person walks past a row of houses in Toronto. Photo by Cole Burston/The Canadian Press Files

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For those concerned about their mortgage payments, lower payments are better than higher payments.

You would think that such a truism would be self-evident, but the experts at our housing authority did not seem to understand this when they dismissed the benefits of a 40-year repayment plan to reduce mortgage risk.

In its latest report on the mortgage industry, the Canada Mortgage and Housing Corporation (CMHC) asked a simple question: “Would increasing the amortization period from 30 to 40 years help [mortgage market] Risk?”

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Their conclusion: “Our simulations suggest that extending the repayment schedules from 30 to 40 years would only marginally reduce the risk on the mortgage market.”

“Longer amortization periods do not offset higher interest rates on monthly mortgage payments,” a CMHC spokesperson told me.

Come back?

Hey, I appreciate the CMHC and the benefits it brings to Canadians, but these conclusions have two serious problems:

They make little sense.

They potentially mislead policymakers and reduce the likelihood that the government will provide Canadians with the mortgage relief they need.

On the first point, the CMHC notes that “at current interest rates, increasing the repayment plan from 30 to 40 years would reduce monthly mortgage payments by only 5 percent.”

After speaking with the authors of the report, I have serious concerns about their assumptions. But let's put those concerns aside and delve into a more realistic scenario.

Consider someone who took out a standard mortgage five years ago at a typical interest rate of 2.89 percent. Now let's say they renew the mortgage with $300,000 and 20 years left. The lowest offered conventional interest rate they would find at a bank today is about 5.14 percent. This is a common renewal scenario that plays out across the country.

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Now imagine that person is struggling because their spouse has been working less, they are drowning in debt, Ottawa keeps raising their tax burden, and the cost of living has increased by more than 18 percent in five years. This is another scenario that affects hundreds of thousands of Canadians right now. And it's even worse if the value of their home has plummeted and it's becoming difficult to refinance or sell for a profit.

So the question is: If the government supported amortisation over up to 40 years upon renewal, would this significantly reduce the risk?

For the family mentioned above, that would certainly be the case. Otherwise, they would face a standard renewal payment of almost $2,000 per month.

On the other hand, if regulators openly allowed banks to offer 40-year amortization for their contracts, that rate would fall by 27 percent ($1,464 versus $1,994).

Admittedly, banking regulators are nervous about letting Canadians “cash out” their repayments. Slower repayments increase the bank's risk to a small extent.

But do you know what also increases a bank's risk? When borrowers don't make their payments at all!

For months, we have been bombarded by headlines and politicians with warnings about renewal risks, renewal risks and more renewal risks.

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There is a simple solution that largely mitigates this danger: allow lenders to extend their mortgages after cycles of extreme interest rate increases – like the one we are still going through now.

And let's limit the 40-year amortisation to those who renew their contract – giving it away like candy to every buyer would only drive up property prices further, and that is counterproductive.

And if regulators want to limit purchasing power at low interest rates (which they are doing because of the impending credit-income constraint), they can reduce repayments to the standard 25 years (insured default) or 30 years (uninsured default) once Bank of Canada rates return to “neutral.” Note: The Bank of Canada's median neutral rate estimate is about 200 basis points below today's level.

In short, throw borrowers a visible lifeline when they need it most – and only when they need it most.

The government's current solutions are the vague Mortgage Charter and the Financial Consumer Agency of Canada's guidelines, which urge banks to help “at-risk” borrowers. Yet to get any help at all from their lender, consumers often have to demonstrate financial hardship, and many don't understand the extent of the help available until it matters. In addition, many lenders don't even offer needy borrowers the critical 40-year amortization.

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A straightforward government policy that allows for repayments at renewals over 40 years – when interest rates rise above neutral – would help families prepare for what analysts like to call the “renewal cliff”.

But back to the CMHC report. Just because longer repayment periods don't offset all the effects of rising interest rates doesn't mean they don't significantly reduce mortgage risk – as we have been led to believe.

It's another reminder not to simply believe reports on the housing market just because they have the Canadian government's logo on them. When asked how a 40-year amortization would improve affordability for Canadian mortgage renewers, the report's authors, Deputy Chief Economist Tania Bourassa-Ochoa and Senior Specialist Seamus Benwell, told me, “It's true that it would help people,” adding that they're “not saying that longer amortizations don't make a difference.”

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Good. But the people who make decisions about systemic risk and how to help families in need didn't read that into the CMHC report.

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Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

Want to know more about the mortgage market? Read Robert McLister's new weekly column in the Financial Post to find out the latest trends and details on finance opportunities you can't miss.

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