In a recent speech, the Bank of Canada’s Senior Deputy Governor Carolyn Rogers cautioned about “tinkering too much with the mortgage market.” My concern is that we are not tinkering enough.
Rogers pointed out that, based on current mortgage rates and average mortgage size, a borrower stretching their amortization from 25 to 30 years could reduce their payments by $200 a month but would likely pay an additional $50,000 in interest costs over the life of the loan. This analysis overlooks the range of payment flexibility available to borrowers. They can, for example, choose to increase payment frequency from monthly to bi-weekly or even weekly, which can significantly shorten the amortization period. Additionally, standard mortgage terms typically allow borrowers to increase their regular monthly payments or make annual lump-sum payments. Any of these options will substantially decrease the amortization period and reduce interest costs. Data from CMHC’s mortgage securitization reports show that many borrowers make prepayments on their mortgages.
Certainly, some borrowers may struggle with their mortgages, and while defaults are an unfortunate reality, it’s unclear how this specific change would lead to systemic risks in the financial system. This doesn’t mean that all mortgages should have extended amortizations. The recent move by the Finance Department aims to target these changes specifically to first-time homebuyers and buyers of newly constructed homes priced at up to $1.5 million. Importantly, borrowers must still meet the debt service coverage tests and the stress test.
Given current housing affordability issues, this initiative is unlikely to trigger a surge in demand. Even if a mortgage with a longer amortization period might end up being more expensive, this doesn’t inherently make it a poor choice. If extending the amortization period is a means to achieving home ownership, it can still be a valid strategy, especially when considering the long-term financial benefits of owning a home. Homeownership, as shown by Statistics Canada’s Survey of Financial Security, 2023, can significantly increase net worth, particularly in retirement, compared to renters.
My question is, what exactly constitutes “too much tinkering,” given that tinkering involves making small adjustments? The Bank of Canada tends to view these changes through the lens of financial stability. I agree that we should avoid a repeat of the early 2000s, when insurers competed aggressively for market share until new entrants were forced out of the market. However, if anything, this expansion of insured mortgages was a result of a policy decision by Federal Finance to encourage competition. The tightening of the rules only occurred after pressure from organizations like the Bank for International Settlements (BIS) and the International Monetary Fund (IMF).
However, it seems that we have swung too far in the other direction and are now reluctant to make necessary changes to improve the efficiency of the mortgage finance market. Our securitization programs are stuck in the past and need to be adapted to reflect changes in the market over the past 15 years. Similarly, there has been no fundamental innovation in the mortgage insurance sector during this period.
As the Bank of Canada has pointed out, “there’s room to improve.” One step the Bank should take is to establish a Canada Mortgage Bond (CMB) repo market for the Government’s holding of CMBs. Without a repo facility, the government’s sizable portion of CMB issuances limits efficient hedging by program participants, which in turn hinders market efficiency.
If we want to improve affordability, targeted changes to our mortgage finance system are essential. Historically, changes to the Canadian mortgage market have been made in a measured and controlled way. It’s time that we broaden our focus beyond financial stability when exploring strategic adjustments to the mortgage market.
Independent Opinion
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