Canada caps insured mortgages at 25-year amortizations, but some want them to go longer to help with affordability issues

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The possibility of allowing longer mortgage amortizations has come up repeatedly in Canada over the years, with regulators and lawmakers generally taking a conservative approach and pushing in the opposite direction. But with housing affordability at crisis levels, is it finally time for Canada to embrace mortgages of 30 years and beyond? The Financial Post’s Denise Paglinawan explores the issue.

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First things first: What do you mean by a 30-year mortgage?

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In Canada, when talk turns to 30-year mortgages, generally we are talking about the amortization period — that is, the length of time it would take to pay off a mortgage in full, at a given monthly payment level and current interest rates. The standard amortization period has historically been 25 years in Canada though those with a down payment of at least 20 per cent can access longer terms. At least one lender, Equitable Bank, recently offered a 40-year amortization product, though it is no longer available.

How does that differ from the contract term?

While amortizations are still generally 20 or 25 years, the actual term of a mortgage contract in Canada is much shorter, usually five years. That means every five years, Canadians need to renew their mortgages at prevailing rates. This differs markedly from the United States, where 30-year mortgage contracts are the norm. That means you have the same loan for 30 years, and are stuck with the interest rate. Sometimes, those two ideas get confused, so it is important to draw the distinction.

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Who wants longer amortization periods in Canada?

This month, an industry group representing Canadian homebuilders called on the government to relax rules around 30-year mortgage amortizations in order to help make it easier for first-time homebuyers to enter the housing market. The Canadian Home Builders’ Association was referring to the rule that limits buyers to 25-year amortizations for insured mortgages, which are required when they have less than a 20 per cent down payment.

What are the pros and cons?

For new buyers, many of whom have been shut out of the market due to high prices and interest rates, allowing longer amortizations could make homes more affordable by reducing the monthly payment. What isn’t always immediately apparent, however, is that the total amount of interest paid over the life of the mortgage is higher and it takes longer to build equity in the home. Some regulators have also expressed concern that extending amortization periods may increase demand and push up home prices, aggravating the affordability issues they were trying to address.

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What about 30-year mortgage contracts? Could they come to Canada?

There are a number of reasons why mortgage contracts of more than 10 years don’t exist in Canada, according to mortgage specialist Robert McLister. First, banks like to match funds, and a competitive funding market has never developed here for mortgages longer than five years, he said. Another reason is that the Interest Act limits prepayment charges to three months of interest after the first five years of a term, which becomes a big risk to banks because they would have to pay to hedge long-term rate exposure. McLister said banks cannot recoup that loss, so they have to price that risk into their long-term mortgage rates. That makes 10-year mortgages significantly more expensive than fixed mortgages with terms of less than five years, he said. Lastly, there’s just not a lot of consumer demand, due to rate premiums of between 70 to 115 basis points, depending on whether mortgages are insured or uninsured.

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How are U.S. lenders able to offer them then?

McLister said U.S. lenders don’t face the same issues as their Canadian counterparts. They’ve long had cost-effective funding beyond five years, whereas Canada has not. “American’s have a very deep securitization market for 30-year mortgages, and that’s largely why you can get them so cheaply over there. It’s a very, very different market there,” he said.

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