Longer mortgage terms, shared equity mortgages and the creation of a market for private mortgage-based securities could help lower risks in the Canadian financial system, said Bank of Canada (BoC) governor Stephen Poloz in a speech on Monday.
The head of the BoC mulled over these strategies as Vancouver and Toronto are dealing with slowing housing markets and young people are struggling to buy homes due to high prices.
Mortgage terms that last longer than five years present a host of benefits for consumers, Poloz told the Canadian Credit Union Association and Winnipeg Chamber of Commerce. These include fewer required renewals and the reduced risk that they’ll be hit with higher interest rates. Longer terms could also help borrowers, since fewer renewals would mean more stability.
Seven and 10-year mortgage terms are currently available in Canada, but few people take advantage of them: only 2% of all fixed-rate mortgages issued in 2018 had durations of more than five years.
Poloz is also a fan of shared equity mortgages. In March, the federal government unveiled the First-Time Home Buyer Incentive in its annual budget, a shared equity program that would see the country’s national housing agency, The Canada Mortgage and Housing Corporation (CMHC), help fund the down payments of eligible first-time homebuyers. In exchange, the CMHC would have an equity stake in the homes they fund.
Poloz said that the shared equity approach could help make the housing market safer because it would distribute the risks of homebuying between the borrower and the lender.
The CMHC is expected to release more details about the incentive later this year, but some private companies have already started offering shared equity mortgages on their own terms.
Finally, Poloz said that a private market for mortgage backed securities — investments secured by mortgages — is on the horizon. While this type of investment product would have to be designed carefully — mortgage-backed securities were central to the U.S. housing crash in 2007 — it could also become a flexible source of mortgages that aren’t insured by the CMHC.
Poloz’s speech comes during a strange time for the Canadian housing market. Homebuyers are still feeling the impact of the mortgage stress test that was introduced at the start of 2018, while resale activity has dropped in Vancouver and Toronto — although it has started to pick up again this spring.
Overall, his outlook is optimistic.
“To be clear, the system is not broken — it has served Canadians and financial institutions well,” he said.
“But we should not stop looking for improvements and I invite all of you to join this effort.”