Robert McLister: Let renewers extend mortgage repayment after extreme rate hike cycles
Its conclusion: “Our simulations suggest that extending the amortization schedules from 30 to 40 years would only negligibly reduce the risk in the mortgage market.”
“Longer amortization periods do not offset higher rates in terms of monthly mortgage payments,” a CMHC spokesperson told me.
Come again?
Hey, I appreciate CMHC and the good it does for Canadians, but there are two serious problems with these conclusions:
They make little sense.
They potentially mislead policymakers, reducing the chances that government gives Canadians the mortgage relief they need.
After chatting with the report authors, I have major qualms with their assumptions. But let’s park that concern and dive into a more realistic scenario.
Picture someone who got a standard mortgage five years back at a typical rate of 2.89 per cent. Now suppose they’re renewing with $300,000 and 20 years left on their mortgage. The lowest advertised conventional rate they’d find at a bank today is roughly 5.14 per cent. This is a common renewal scenario playing out all across the country.
So, the question is, if the government supported amortizations up to 40 years at renewal, would that meaningfully dial down risk?
It sure as hell would for the family above. They’d otherwise face a standard renewal payment of almost $2,000 a month.
In contrast, if regulators openly allowed banks to offer 40-year amortizations to renewers, that same payment plummets 27 per cent ($1,464 vs. $1,994).
Granted, bank regulators get nervous about letting Canadians “am out” their re-payments. Slower principal payoff increases bank risk to a minor degree.
But you know what also increases bank risk? When borrowers don’t make their payments at all!
For months-on-end, headlines and policymakers have bombarded us with warnings about renewal risk, renewal risk, renewal risk.
Well, there’s a simple solution that mitigates much of that danger: let renewers extend mortgage repayment after extreme rate hike cycles, like the one we’re still enduring.
And let’s keep 40-year amortizations exclusive to renewers — handing them out like candy to every buyer would just inflate home prices further, which is counterproductive.
In short, throw borrowers a visible lifeline when they need it most — and only when they need it most.
A straightforward public policy of 40-year amortizations at renewal — when policy rates soar past neutral—would help families plan for the “renewal cliff,” as analysts like to call it.
Now, back to the CMHC report. Just because longer amortizations don’t offset all the impact of rising rates doesn’t mean they don’t ease mortgage risk significantly — as one’s led to believe.
Fine. But the people making decisions on systemic risk and how to help struggling families wouldn’t have gleaned that from CMHC’s report.
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