Longer mortgage amortization urged
March 16, 2018
Mortgages of more than 25 years would benefit homebuyers and increase competition in the mortgage market, according to a new report from the C.D. Howe Institute. In “The Case for Longer Mortgages: Addressing the Mismatch between Term and Amortization” author Michael Feldman proposes a solution that would expand consumer choice, facilitate a private securitization market and reduce government mortgage risk.
Canadians are typically offered residential mortgages with 5-year terms and 25-year amortization periods, notes Feldman. As a result, homebuyers owe a large amount on the last day of their mortgage term, before it is fully paid off; such payments are known as “balloon payments.”
“This creates a risk to both investors in mortgages and borrowers, if the lender is unable to renew the loan at maturity, and the borrower is unable to find a new lender,” Feldman said.
“If the federal government could facilitate a shift to longer mortgage maturities, borrowers and investors would be better protected from mortgage lenders that become insolvent,” said Feldman.
Recent changes to tighten mortgage lending could convince more borrowers to go with longer amortization periods to lower monthly mortgage costs. Currently, the new federal rules do not restrict amortizations longer than the conventional 25 years.
Ratespy co-founder Rob McLister explained that a 35-year mortgage would enable more homebuyers to qualify for a mortgage.