Proposed charter makes provisions for temporarily extended terms
It’s been one of the trends of the year in Canada’s mortgage market: borrowers facing steep interest rate hikes deciding to ease some of the immediate shock by stretching out their amortization and keeping payments at a manageable level.
The option hasn’t been without its critics: Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), has warned of the long-term risks to borrowers of extended mortgage terms, while others still view the measure as one that essentially kicks the can down the road.
Still, the dramatic spike in interest rates witnessed over the past 20 months means there’s little other choice for scores of borrowers other than to lengthen their mortgage terms – and the federal government has appeared to accept that reality in its proposals for a Canadian Mortgage Charter, unveiled in finance minister Chrystia Freeland’s recent fall fiscal update.
That charter said Canadians could expect the continued allowance of temporarily extended amortization periods for squeezed borrowers, with fees and costs associated with relief measures to be waived.
It also said it would permit financially burdened homeowners to “make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties,” while financial institutions would be required not to charge interest on interest in the event of temporary amortizations.
Borrowers initially wary – but ultimately open to longer terms
While many borrowers are wary about the prospect of stretching out their mortgage amortization, plenty are put at ease after a conversation detailing their options and the possibility of changed circumstances down the line, according to a Nova Scotia-based mortgage broker.
David Clarke (pictured top), of Clarke Mortgage Group, told Canadian Mortgage Professional that amid a cost-of-living crisis and tighter budgets, longer amortizations as a temporary measure were sometimes the only choice for impacted homeowners.
“I’ve been telling clients ‘[if] you extend your amortization now, if rates drop in three or four years, you can quicken it up then if [you’re able],’” he said. “I find affordability is so bad when people ae having trouble paying for gas and food, so extending the amortization and freeing up some money here is the only option.
Economist David Rosenberg warns that the Canadian government's mortgage relief measures, outlined in the fall economic statement, may exacerbate the overheated housing market and lead to prolonged corrections.
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 24, 2023
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“If they can weather the storm for the next two, three, four years or whatever when rates are high, then they have the ability to make different decisions when rates are lower.”
The conversation can sometimes be a difficult one, Clarke said, particularly because many borrowers have the view that extending a mortgage amortization simply isn’t something they should consider.
“It’s not the best answer, but for a lot of people it’s the only thing,” he said. “I find with clients too, sometimes it’s funny: it’s almost like they’re uncomfortable and then when I’m like, ‘Hey, it’s OK to do whatever you need to do to make this affordable,’ they almost get a sigh of relief.
“It’s like they feel they’re not supposed to ask to extend the amortization or pay off debt or anything.”
Interest rate conundrum set to continue into 2024
Activity on the purchase side of Canada’s housing and mortgage markets has slowed considerably since the central bank embarked on its rate-hiking path, with Clarke’s province of Nova Scotia seeing home sales slide 23.8% below the five-year average and 13% below the 10-year average for the month of October.
Still, prices do not appear to be plunging. In fact, the benchmark price for single-family homes rose by 8.1% last month compared with the same time in 2022, jumping to $394,600, while townhouse and row units posted a 12.3% average increase on a year-over-year basis to a $509,000 benchmark price.
That means affordability challenges aren’t easing in the current market – but with rates projected to fall at some point in 2024, buyers could see some relief in the amount of mortgage they can qualify for, potentially causing a degree of built-up demand at present.
“It’s kind of a funny time for people that are trying to make moves because they don’t really know: ‘Should I do it now? Should I do it six months from now?’ So for people that have the luxury of waiting, maybe wait until the spring or see what happens,” Clarke said.
“If you don’t have the luxury of waiting, then you’ve got to do what you’ve got to do. But it’s going to be interesting to see what happens in the spring – so if they can wait, some people have been waiting.”
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