06/29/2024
The Canadian government is being urged to allow 40-year mortgage amortizations for those renewing their mortgages, as discussed in a recent Financial Post article. This suggestion follows the release of CMHC's Residential Mortgage Industry Report, which considered if 40-year mortgages would mitigate risks in the mortgage market. The idea of 40-year mortgages isn't new, having been part of Canada's past until post-financial crisis reforms tightened standards.
The Financial Post argues that extending amortizations would reduce risk, citing a minor 5% reduction in monthly payments. However, CMHC's analysis suggests that factors like unemployment and higher interest rates are more significant risk drivers. Extending amortizations, according to CMHC, doesn't significantly mitigate risk and can leave borrowers paying much more interest over time.
Historically, reducing amortizations was intended to cut down interest payments and improve financial stability. Longer amortizations could leave borrowers vulnerable in retirement and expose banks to greater risks if property values decline. Even so, the Financial Post points out that not making mortgage payments at all is riskier.
Moreover, the argument seems to benefit primarily those who took on low-interest mortgages during the pandemic. Critics argue that this approach would unfairly favour those recent buyers, leaving others with different rules and potentially leading back to pre-global financial crisis risk levels.
In summary, the Financial Post suggests that the government should allow longer amortizations to help those renewing mortgages soon. However, this approach has been criticized for increasing risks for both borrowers and lenders, and for potentially favoring a specific group of recent homebuyers over others. Whether the government will adopt this policy remains uncertain, but the issue will continue to be closely monitored.
