Senior deputy governor of the Bank of Canada Carolyn Rogers speaks at a news conference in Ottawa, on Sept. 4.Justin Tang/The Canadian Press
A top Bank of Canada official says there’s “no free lunch” with the country’s new easier lending rules and is warning policy makers against relying on the mortgage market to fix housing affordability problems.
Under new rules announced in September, Canadians will be able to put smaller down payments on pricier homes and first-time buyers will be able to stretch out their payments over 30 years instead of 25 years, effective mid-December.
The policies are aimed at helping younger buyers get into the housing market where the average home price is $670,000 across the nation and more than $1-million in Toronto and Vancouver.
But Bank of Canada senior deputy governor Carolyn Rogers is warning consumers will pay a price later for the more lenient payment terms.
“Steps to reduce the short-term cost of mortgages for borrowers can increase their long-term costs,” Ms. Rogers said in a speech to the Economic Club of Canada on Wednesday.
Using today’s interest rate and the average mortgage size, Ms. Rogers said that a borrower who stretches out their mortgage payments over 30 years instead of 25 years could reduce their monthly payments by $200.
But she said those borrowers would end up paying an additional $50,000 in interest costs over the life of the mortgage.
As well, she said that even though lenders will profit from the longer mortgage terms, she said they will face risks because there is less equity or capital available for the homeowner if they encounter financial stress.
“There’s no free lunch,” she said.
However, if a borrower was required to pay for mortgage insurance, the lender will be protected if the homeowner defaults on mortgage payments.
The new mortgage policies go into effect Dec. 15 and are the most significant relaxation of borrowing rules in more than a decade. They are the federal government’s latest attempt to address the country’s affordable housing shortage.
Ms. Rogers said it was encouraging to see all levels of governments focused on trying to make 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.”
Ottawa has also tried to boost home building by offering cheaper loans for developers who build rental-only apartment buildings. The federal government has also changed rules to allow some homebuyers to purchase preconstruction homes with an insured mortgage with a 30-year amortization instead of 25 years.
Ms. Rogers said housing affordability requires a better balance between supply and demand. “Leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy,” she said.
Canada has a reputation for having the highest ratio of household debt to disposable income among the Group of Seven advanced economies, which includes the U.S.
The runup in home prices over the pandemic’s real estate boom exacerbated the problem. Many homeowners with mortgages have been renewing at much higher interest rates and have higher mortgage payments.
More mortgage borrowers will be renewing over the next two years and will face higher mortgage payments. Earlier this year, the Bank of Canada estimated that the median monthly payment would jump by more than 60 per cent for those with a variable-rate mortgage.
Even though the central bank has cut its benchmark interest rate to 3.75 per cent from 5 per cent over the past five months, Ms. Rogers said the majority of borrowers who are up for renewal will “likely face a significant increase in their payment.”
So far, borrowers appear to have withstood the higher payments. Data show that the default rate on residential mortgage loans at major Canadian banks is still well below 1 per cent.