The Bank of Canada (BOC) Governor Stephen Poloz recently proposed an interesting suggestion as a solution for mitigating housing market risk: longer mortgage terms.
In early May of 2019, Poloz gave a speech in Winnipeg to the Canadian Credit Union Association and Winnipeg Chamber of Commerce where he said longer mortgage terms would “mitigate risks in the system both for lenders and for borrowers.”
Seven and ten-year mortgage terms are currently available in Canada, however, BOC data shows that currently only 2% of mortgages have terms greater than five years. Poloz did not specify how long terms could be. According to Canadian Mortgage Trends, in the U.S., terms of 15, 20, and even 30 years are common.
James Laird, President of CanWise Financial, told Canadian Mortgage Trends that even the five-year fixed mortgage term is longer than most borrowers want. Statistics show that most mortgage terms are kept for just under four years.
According to Poloz, longer terms would mean fewer mortgage renewals, reducing the risk of facing higher interest rates. Policymakers would also benefit from increased stability.
In a release by the BOC, they wrote: “While Canadian homeowners and financial institutions have been well-served by our mortgage market, ‘we could look at ways to develop a more flexible mortgage market that gives more choice to customers, lenders and investors, while making the market safer and more efficient,’ Governor Poloz said.”
In addition to longer mortgage terms, Poloz also suggested developing a market for private mortgage-backed securities and encouraging different mortgage designs, including shared equity mortgages.
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