Photo: James Bombales
As the federal government’s budget announcement next week fast approaches, RBC is renewing its warning to policymakers against extending maximum mortgage amortization periods, a move that would let Canadians take longer to pay off their homes but also increase risks to the economy at large.
The Canadian government has been facing calls from real estate industry groups to step in and provide some relief for first-time homebuyers as they continue to grapple with a stress test that forces them to qualify at higher interest rates than they are signing on for.
Extending the maximum amortization period for uninsured mortgages is just one option at policymakers’ disposal. Currently, when a homebuyer has a downpayment of less than 20 percent, they are required to pay for mortgage insurance. But insured mortgages from federally regulated financial institutions are capped at 25 years, compared to 30 years for the uninsured mortgages with larger downpayments.
Housing Market News Alerts
Sign up now for news alerts on the Canadian housing market
Spreading out the cost of ownership over a greater number of years would shrink monthly payments, but RBC cautions against simply extending maximum amortization periods. The bank’s chief economist Craig Wright references an earlier RBC report that examined global homeownership rates and showed that even Canada’s most expensive cities compare favourably to other global urban centres.
“As we recently argued, it isn’t even obvious that there is a problem with ownership rates themselves, and most of the proposed solutions would actually make home ownership more challenging by inflating prices, unless they were accompanied by measures to improve supply,” writes Wright in the bank’s Federal Budget Preview 2019.
“To the extent that the government follows this path, we also worry it would lead to a rise in the number of highly indebted, higher-risk households in Canada,” Wright continues.
Household debt in Canada ballooned during a period of rock-bottom interest rates, and according to credit bureau Equifax Canada, consumer debt, which includes mortgages, totalled $1.906 trillion in the fourth quarter of 2018. That’s up 4.6 percent from a year ago.
But doing nothing to help first-time homebuyers also has the potential to create issues for the economy, Paul Taylor, CEO of Mortgage Professionals Canada, suggests.
“If we want to continue to encourage home ownership for the young middle class, we’re going to have to do something,” he told Livabl in a recent interview. “In a decade or 15 years ago from now… the average Canadian’s balance sheet is going to be an awful lot more soft, and that’s not a great day for our economy either,” he says.
If the federal government isn’t going to tweak the mortgage stress tests, Taylor recommends bringing back 30-year amortization periods for uninsured mortgages. “I don’t envy the policymakers, I know that this is a pretty complex set of circumstances they have to work with.”