21 February 2011
The article also cites a recent study by John Kiff, IMF’s senior financial sector expert. It says that Americans, by contrast, choose longer term mortgages more often. In addition to it, they have far broader mortgage product choice. They understand that longer terms can provide borrowers with better protection against the risk of interest rate hike.
Actually, some economists consider five-year products to be quite risky, because the payments may suddenly rise at the end of the term. Another tricky moment is that not every lender may want to renew your loan.
Mr. Kiff tries to explain why 10- and 20-year mortgages aren’t so popular in Canada. The main reason is that lenders consider them uneconomical.
Usually, banks protect themselves from the risk of prepayment by charging certain penalties. But according to recent regulations, there are strict limits on such penalties. “So the banks focus on five-year mortgages,” – Mr. Kiff says.
In other words, lenders can’t charge what they want, so they simply don’t offer longer term mortgages at an affordable price.
Mr. Kiff, who has worked at the BoC for some time, said it would be better for the Canadians to have more choice of longer term mortgages. In fact, the IMF recently suggested that the federal government should change mortgage rules so that lenders would provide broader product choice without unnecessary charge limits.
“The main task is to let the market determine how the rates should change,” – he said. “The choice of a mortgage product depends on the borrower’s personal situation.”
That’s why it’s necessary to understand that mortgage brokers have access to a wide range of lenders and their mortgage products. Please, consult your mortgage broker in order to see what’s best for you.