The former chair of the Canada Mortgage and Housing Corporation (CMHC) says longer mortgage terms like those typically seen in the U.S. could eventually be offered in the Canadian market, but it would require a number of fundamental changes.
“In theory, there’s no reason why we can’t have a long-duration fixed-rate instrument in Canada,” Robert Kelly, who is also the former CEO of BNY Mellon, told BNN Bloomberg in a Monday interview.
Kelly said that although term lengths are shorter in Canada compared to the U.S., 30-year amortization periods are already common in both markets, and there are certain benefits Canadian mortgage holders can access that aren’t available in the U.S.
“Canadians have something far better than the U.S., they have what’s called portability – that is if you want to change houses, you can move your mortgage from the old house to the new house; you can’t do that in the U.S.,” he explained.
Kelly also noted that Canadian lenders already offer 10-year mortgage terms, but they’re not as popular as the more common five-year or two-year options.
“Canada does have a 10-year product, but there doesn’t appear to be anyone interested in it. They’ll go for two years to five years; five years tends to be the norm. You can go to 10 years but it’s more expensive,” he said.
“In the end, could we have it? Yes … (but) there’d be a lot of work to do.”
Kelly said that for the Canadian mortgage market to more closely resemble what’s offered in the U.S., there would need to be regulatory changes made with respect to refinancing and pre-payment options.
He also said that there would need to be enough investors interested in holding longer-term mortgages, as Canada’s major banks have historically preferred shorter terms.
“The reason why a 30-year didn’t exist in Canada is because banks hold them on their balance sheet. Most of their liabilities go out to five years, they don’t go out to 25 or 30 years,” Kelly said.
“As a result, they don’t love long-dated mortgages because it creates the mismatch between the loans and the deposits that can be unbelievably risky.”
Kelly said there is a long list of challenges that would need to be addressed for 30-year fixed mortgage terms to become an option for Canadian buyers, but he said it would be possible with enough buy-in from regulators and lenders.
“You couldn’t do it overnight. You could do it over time, and the question is, do you have enough investors … that would actually buy these things instead of banks? Banks would probably own some of them, but not that many,” he said.
“It would be a long-term project, but it could happen over time.”