Bank of Canada Senior Vice President Carolyn Rogers spoke at a press conference in Ottawa on September 4.Justin Tan/Canadian Press
A senior Bank of Canada official says there is no “free lunch” in the country's new loan relief rules, warning policymakers not to rely on the mortgage market to solve housing affordability problems. .
Under new rules announced in September, Canadians will be able to make smaller down payments on more expensive homes, effective from mid-December, and first-time buyers will be able to make payments over 25 years instead of 25 years. It can be extended to 30 years.
The policy is aimed at helping young buyers enter the housing market, where the average home price is $670,000 nationally and more than $1 million in Toronto and Vancouver.
But Bank of Canada senior vice president Carolyn Rogers warns that consumers will pay the price for more generous payment terms later.
“Measures that reduce short-term costs of mortgages for borrowers may increase long-term costs,” Rogers said Wednesday in a speech at the Economic Club of Canada.
Using current interest rates and average mortgage amounts, a borrower who extends their mortgage payments to 30 years instead of 25 could potentially reduce their monthly payments by $200, Rogers said.
But those borrowers would end up paying an additional $50,000 in interest over the life of their mortgage, he said.
He also said that while lenders benefit from longer mortgage terms, they also face risks when homeowners face financial stress because they have less equity and equity available. said.
“There’s no free lunch,” she said.
However, if the borrower is required to pay mortgage insurance, the lender is protected if the homeowner defaults on mortgage payments.
The new mortgage policy will come into effect on December 15 and is the most significant relaxation of borrowing regulations in more than a decade. These are the federal government's latest attempts to address the nation's affordable housing shortage.
Mr Rogers said it was heartening to see governments at all levels focused on making housing more affordable. But she said: “We need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market.”
The City of Ottawa is also trying to encourage housing construction by offering low-cost loans to developers who build rental-only apartments. The federal government also changed rules to allow some home buyers to purchase pre-construction homes with mortgages secured by 30-year amortization instead of 25-year amortization.
Mr Rogers said the balance between supply and demand needed to improve to make housing affordable. “Over-reliance on measures to reduce short-term financing costs could have long-term implications for household financial health, the mortgage market and the economy,” he said.
Canada is known for having the highest ratio of household debt to disposable income of the seven developed countries, including the United States.
Soaring home prices due to the pandemic-induced real estate boom have exacerbated the problem. Many homeowners with mortgages renew at much higher interest rates, resulting in higher mortgage payments.
As more mortgage borrowers renew over the next two years, mortgage payments will increase. Earlier this year, the Bank of Canada estimated that the median monthly payment for people with adjustable-rate mortgages could jump by more than 60%.
Mr Rogers said that despite the central bank lowering the benchmark interest rate from 5% to 3.75% over the past five months, the majority of borrowers waiting to renew “could face a significant increase in their payments. “It's expensive.”
So far, borrowers appear to be enduring the high payments. Data shows that mortgage default rates at Canada's largest banks remain well below 1%.
