Canada should introduce more mortgages with longer renewal terms, says Desjardins, the country's largest financial co-operative. According to a report released on Monday, offering more 10-year mortgage options could help households manage "payment shocks" when renewing their debt after interest rate hikes. This would also reduce the economy's sensitivity to higher borrowing costs and decrease reliance on "negative amortization" fixed-payment variable products, which the Bank of Canada and the country's banking watchdog have flagged as concerning.
Traditionally, Canadian homebuyers avoid 10-year fixed-rate mortgages due to their higher cost. Desjardins' Chief Economist Jimmy Jean and Macro Strategist Tiago Figueiredo argue that if longer-term mortgages had been more common and attractive, the impact of rate increases would be less severe for households. Currently, Canada's mortgage market is dominated by shorter-term contracts, typically five years or less, unlike the U.S., where 30-year mortgages are standard.
This lack of long-term options leaves Canadian households vulnerable to interest rate spikes. With borrowing costs rising globally, Canadians are spending more of their income on debt payments compared to other countries. Shorter-term mortgages became popular over the past 40 years due to falling interest rates, incentivizing frequent rate resets.
Jean suggests several measures to make 10-year terms more accessible and affordable. These include changing legislation to reduce prepayment penalties on loans over five years and developing a "private label" residential mortgage-backed securities market. Allowing more covered bonds could also help. Jean believes that with the right conditions, competitive pressures will encourage lenders to offer longer-term mortgages, benefiting both borrowers and lenders.
Since early 2022, about half of all Canadian mortgages have renewed at higher rates. The Bank of Canada had begun exploring mortgage innovations before the pandemic, but efforts have stalled. Some lenders have tried to assist borrowers with variable rate mortgages by permitting unpaid interest to be added to the principal or allowing interest-only payments.
Desjardins' report highlights the need for better mortgage products to prevent future financial strain on borrowers, suggesting that government action to encourage lender leniency could have been avoided with more robust mortgage options in place.
