CMHC CEO doesn’t think increasing the mortgage amortization period is a good idea

Canada Mortgage and Housing Corp. (CMHC) doesn’t support the idea of increasing the maximum amortization period for new mortgages, stating that changes aimed at reducing monthly payments will raise demand and lead to even higher real estate prices.

Today, borrowers have a maximum of 25 years to pay down their mortgage in case their down payment is less than 20% of the home’s price. In addition to it, they need to pay for mortgage insurance, which protects banks from losses if a borrower can not pay off the loan.

While in case of certain borrowers with variable-rate mortgages the amortization periods have temporarily grown above 25 years when interest rates went up, CMHC CEO Romy Bowers says she is not planning to introduce expanded mortgage terms as a permanent option for new homebuyers.

“It’s better to focus on raising the supply instead of making it easier for people to borrow more money,” – Ms. Bowers explained. “In our opinion, it’s probably not the best idea to do it amid a restrained supply environment.”

According to Ms. Bowers, extending the amortization period for insured mortgages may increase demand for real estate and raise the purchasing power of Canadians, which would just be transferred into the cost of housing.

The maximum amortization period of 30 years applies to borrowers with a minimum of 20% down payment. There are still some lenders offering 35 years, but you’ll have to face higher interest rates.

The Trudeau government has been trying to make it easier for first-time homebuyers to make a purchase by implementing tax incentives and government loan programs. However, it has never increased the amortization period.

Nevertheless, over the previous year, the central bank raised its key lending rate from 0.25% to 4.5% and most borrowers with an existing variable-rate mortgage saw their amortization period automatically extended. The deal is that some variable-rate borrowers have fixed monthly payments and when the rates went up, a higher share of their monthly payment went toward interest and less toward principal.

As a result, many variable-rate borrowers were forced to either raise their monthly payments or extend their amortization period.

Ms. Bowers says CMHC is managing risks connected to extending amortizations and those increased insured loans account for only a tiny share of the agency’s portfolio. CMHC is in constant contact with lenders, who are reaching out to borrowers to make sure they can cope with higher monthly payments.

The latest data shows that the mortgage arrears rate reached 0.15% in February. According to Ms. Bowers, such losses are usually caused by unemployment, and not by the shock from rate hikes.