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Call for Longer Mortgage Terms Raises Questions STEVE HUEBLMAY 8, 2019
Article Link; https://www.canadianmortgagetrends.com/2019/05/bocs-call-for-longer-mortgage-terms-raises-questions/
Earlier this week, Bank of Canada Governor Stephen Poloz called on banks and other lenders to offer more innovative mortgage products, namely longer-term mortgages.
During a speech in Winnipeg, he said longer mortgage terms would mitigate the normal risks in the system both for lenders and for borrowers. He didnt specify just how long those terms could be, but the longest widely available term in Canada is currently 10 years, while terms of 15, 20 or even 30 years are common in the U.S.
For consumers, the reduced mortgage renewal frequency over the life of the mortgage would remove the risk of renewing into higher rates, Poloz said. Of course, a longer-term mortgage will carry a higher interest rate, but some homebuyers may be willing to pay more to lower their risk, he added.
Just how much more? Rate expert Rob McLister of RateSpy.com suggested a 30-year mortgage, for example, could run around 3.75% or more given where bond market spreads are right now.
And thats probably a best-case rate, assuming a liquid funding market. In the U.S., 30-year rates are north of 4%, he wrote on RateSpy.com. On a standard $300,000 30-year mortgage at 3.75% youd pay $10,829 more interest over the first 60 months aloneversus a 3.00% 5-year fixed.
Little Appetite for Longer Terms
The Bank of Canadas own data shows that currently, just 2% of mortgages have terms greater than five years. And thats for good reason. A longer mortgage comes with certain drawbacks. Aside from paying a higher rate, they would also face a higher likelihood of having to break the mortgage early.
Even though mortgage terms longer than five years are protected by the Interest Actwhich means the penalty for breaking that mortgage would be limited to three months interest (vs. an IRD penalty) after the first five yearsa multi-decade term would heighten the likelihood of borrowers breaking their mortgage early.
For that reason, Ron Butler of Butler Mortgage said mortgages of that length would have to be exempt from breakage penalties, similar to the no penalty system in place in the U.S.
Even Canadas most popular mortgage termthe 5-year fixedis longer than most borrowers stick with their current mortgage for. James Laird, President of CanWise Financial and co-founder of Ratehub.ca, says stats show most mortgage terms are kept for just shy of four years.
Some might suggest that perhaps its bad advice to be recommending these longer terms, Laird said. Because even though the borrower might feel settled, we know that life events occur, which can cause people to break their mortgage more quickly than they are expecting.
Additionally, he said borrowers would need a compelling reason to pay more for the security of a longer term, namely the expectation that interest rates are going to rise over that time. Plus, the extra cost to lock in would have to be reasonable.
If those two things are occurring, and you have a household that thinks theyre not moving for 10 years, okay, youve got ingredients for someone to take a longer term, Laird said, adding the last time he saw those ingredients come together was in 2012 when 10-year fixed rates fell below 4.00%, 5-year rates were above 3.00% and many expected interest rates to rise. But the Governor doesnt help his case by telling us rates are not going to move for a sustained period of time. That is not a good reason to go with a longer term. Thats justification for taking a variable rate or short term.
An Answer to the Stress Test?
Polozs call to arms for the industry to introduce longer mortgage terms appears to be a response to criticism over the governments stress test, which has sidelined the buying intentions of an estimated 40,000 homebuyers since it was introduced last year.
The Bank of Canada has a particular view of the stress test as a means to reduce leverage and tamp down soaring prices, Butler said, suggesting theyre floating the idea of longer mortgages as an alternative solution to assisting homebuyers as opposed to adjusting the stress test.
Poloz himself said, The longer the mortgage term, the less relevant a mortgage interest-rate stress test becomes, pointing to the increased amount of equity built up in between renewal periods.
Up to Government to Create the Appropriate Conditions, Not Lenders
But not everyone believes the onus should fall on the industry to develop solutions to make longer-term mortgages more attractive.
I found it interesting that Poloz is calling on others to make this happen when, in my opinion, its the policy-makers in Ottawa who have actually completely taken away any incentive to lock into a longer-term fixed rate, Laird said, pointing to the stress tests added qualification burden on longer-term rates.
For a 10-year rate at 4.00%, the borrower instead needs to qualify at 6.00% vs. a qualification rate of 5.34% for a shorter term fixed or variable rate, Laird noted. In my opinion, the tools are in (Polozs) hands and the other regulatory bodies in Ottawa. If theyre thinking, Lets get more borrowers into longer-term fixed rates, they can make that happen.
McLister added that if the government is serious about this, it would also have to facilitate cost-effective long-term funding to support those mortgages.
Government-sponsored funding vehicles (like the NHA MBS and Canada Mortgage Bond programs) currently only support up to 10-year terms and are dominated by 5-year securities, he noted. Private mortgage-backed securities, in their current incarnation, would not have tight enough spreads to allow for competitive 30-year rates.
Butler agreed, saying, Vast changes would be required in our mortgage financing system.
In other words, dont hold your breath for cost-effective longer-term mortgages anytime soon.
Residential Market Commentary - Bank of Canada pulls up a seat on the sidelines
Apr 29, 2019
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First National Financial LP
As expected the Bank of Canada has, once again, moved to the sidelines when it comes to interest rate policy. This time, though, the bankers appear to have unfolded their lawn chairs, taken a seat and put their feet up; settling-in for an extended period of inactivity.
The central banks benchmark policy rate was left unchanged at 1.75% during last weeks setting. More significantly, the Bank made a small change in wording to its Monetary Policy Report that sends a big message. It eliminated references to the need for future interest rate hikes, signalling it has shifted to a wait-and-see status. Many market watchers do not expect any rate increases (or decreases) until early 2020.
So what would it take for the Bank of Canada to get back in the game? It would have been something drastic, like a sudden jump in inflation or a rapid drop in employment.
Right now, though, the Bank finds itself somewhat boxed-in. Inflation is showing some signs of increasing, but not enough to justify interest rate intervention. Canadian household debt is climbing back into record territory and higher rates would only compound that problem.
The BoC has to pay attention to what the U.S. Federal Reserve is doing, and right now there is little political appetite for rate increases in the United States. As well, the election cycle is heating up in both the U.S. and Canada and central banks are loath to make any moves that could be seen as giving advantage to any side in an election campaign.
Rate hike weakens over the horizon
Apr 22, 2019
First National Financial LP
The likelihood of a Bank of Canada interest rate increase appears to be getting pushed further and further beyond the horizon.
The Bank is expected to remain on the sidelines again this week when it makes its scheduled rate announcement on Wednesday.
A recent survey by Reuters suggests economists have had a significant change of heart about the Banks plans. Just last month forecasters were calling for a quarter-point increase in the third quarter with another hike next year. Now the betting is for no change until early 2020. There is virtually no expectation there will any rate cut before the end of next year.
The findings put the Bank of Canada in line with the U.S. Federal Reserve and other major central banks. World economies have hit a soft spot largely due to trade uncertainties between China and the United States. Canada is also being affected by depressed oil prices and a slowdown in the housing market.
Market watchers will be paying close attention to the Monetary Policy Report that comes with this weeks BoC rate setting. Realtors and mortgage lenders have been pressuring for some loosening of the B20 stress test to allow some life back into the market. The odds are against the Bank advocating for any easing. Canadian households are still carrying record high debt loads and there are growing expectations of a recession within the next two years.