There is an immediate concern about payment shock for Canadians in variable-rate mortgages and future unease for fixed-rate borrowers at mortgage renewal due to high inflation resulting in increased interest rates.
The Bank of Canada (BoC) raised its overnight rate in October for a sixth consecutive time, impacting interest rates and variable-rate mortgages.
One lender is boldly calling for amortization periods to be increased to 40 years to help alleviate shock for Canadian borrowers upon renewal. Spreading payments out over a longer period results in higher interest payments but more manageable payment amounts.
Alex Haditaghi, founder of Radius Financial, recently warned that the Canadian real estate market would experience a significant correction of up to 30 per cent, risking $1.7 trillion worth of equity, unless the Canadian government reacts immediately and responds with urgent policy changes. In particular, he’s calling for the government to allow homeowners with existing mortgages to renew up to 40-year amortization.
The current maximum is 25 years for insured mortgages (less than a 20 per cent down payment) and 30 years for non-insured (greater than a 20 per cent down payment). A few lenders, such as credit unions, which are provincially regulated, can go up to 35 years. Alternative lenders can also go higher than 25 years but at higher interest rates.
The only solution?
“[Haditaghi] believes that this is the only solution that will allow the Canadian Government to combat inflation without collapsing the Canadian housing market and irreparably damaging the household balance sheets, credit, and home equity of everyday Canadians along the way,” says a press release from Radius Financial.
Haditaghi also notes in the release that 78 per cent of Canadians currently have a mortgage with an interest rate below three per cent, adding that recent rate hikes are placing tremendous pressure on Canadian households. He states that homeowners and the real estate market will feel the burden of this jarring payment increase for at least the next five years, particularly for Canadian households already strained under rapidly rising living costs and relentless inflation.
If Canadians must renew a three per cent mortgage at five per cent, for instance, that’s an enormous burden for the average household to bear.
“It makes perfect sense to help people facing payment shock at renewal by offering longer amortizations,” says Ron Butler, a veteran mortgage broker with Butler Mortgage Inc based in Toronto. For instance, if someone started with a 25-year amortization and didn’t end up paying off any of their principal over five years due to rate increases at renewal, it would be beneficial to allow them to have 25 years again, he explains.
But offering 40-year amortizations to everyone doesn’t make sense, Butler says, adding that we’ve learned record-low interest rates drive up demand, which causes real estate prices to skyrocket.
“As interest rates continue to increase, OSFI is working with lenders to understand the range of actions planned or undertaken by their institutions to identify and manage potentially vulnerable borrowers,” says Carole Saindon, a senior communications advisor for the Office of the Superintendent of Financial Institutions (OSFI).
OSFI doesn’t prescribe a maximum amortization period for uninsured mortgages, but it articulates that federally regulated financial institutions (FRFIs) “should have a stated maximum amortization for all residential mortgages that are underwritten” and that “the average amortization period for mortgages underwritten be less than the FRFI’s stated maximum”.
“Lenders will eventually require borrowers to get back on track with their original amortization schedule,” Saindon adds. “There are a number of ways lenders can get borrowers back on track to an acceptable amortization period. Ultimately, this is a decision that will be made between the lender and the borrower.”
Insured mortgage rules fall under the Department of Finance. Real Estate Magazine reached out for comment about whether there’s anything in the works to help alleviate payment shock upon renewal, including raising minimum amortization periods.
“We are very aware of this issue, and we are following it closely,” says Caroline Thériault, deputy spokesperson and manager of media relations for Finance Canada. “Mortgage insurers have flexibilities that they make available to lenders to help borrowers who are having difficulty due to financial challenges. Flexibilities may include extending the amortization period depending upon the homeowner’s particular circumstances.”
Rates will fall…again
The good news is that over the past 30 years, the BoC has had six periods of interest rate hikes, ranging from 1.25 to 3.2 percentage points, before this most recent set in 2022 (currently totalling 3.5 per cent in increases this year).
These six periods of increases all had one thing in common: it didn’t take long for each of them to be followed by a period of declining rates, ranging from 1.25 to 5.125 percentage points.
Fixed-rate mortgages are also eventually expected to come down as bond yields fall since the bond market is what impacts fixed interest rates.
Cindy Freiman is the owner of Creative Soul Communications. A journalist by trade, she’s passionate about helping businesses grow by creating top-notch educational and thought-provoking content for social media, blogging, client/referral partner communications, marketing and advertising. Cindy has specialized in mortgage financing and real estate for the past 17 years.
