Bank of Canada warns against tinkering with mortgage market

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Bank of Canada deputy governor Carolyn Rogers is cautioning policymakers against “tinkering” with the mortgage market in an effort to improve housing affordability, warning that over-reliance on such measures could have long-term negative impacts.

Recently, the federal government introduced new mortgage rules, including expanding 30-year amortizations to all first-time homebuyers and to all buyers of new builds, effective next month. It also raised the $1-million price cap for insured mortgages to $1.5 million, helping more Canadians qualify for a mortgage with a down payment below 20 per cent.

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Longer amortizations and smaller down payments, however, increase risk for lenders and borrowers, Rogers told the Economic Club of Canada in Toronto on Wednesday, according to her prepared remarks.

She gave the example of a borrower who increases their amortization from 25 years to 30 years, shaving $200 of their monthly payments, but adding an additional $50,000 in interest costs over the lifetime of their mortgage.

Ultimately, Rogers said, a better balance between supply and demand will be needed to improve housing affordability, but it will take time to get there.

“In the meantime,” she said, “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.”

Rogers told the audience that despite widespread concern about the impending mortgage renewal wall, the Bank of Canada only considers it to be a “tail risk” to the economy. The central bank, she said, remains confident the mortgage market has fared well through the recent economic turbulence, with mortgage arrears remaining at historic lows.

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“From a monetary policy perspective, our forecast includes the expectation that households will continue to adjust their saving and spending patterns to absorb the impact of higher mortgage payments,” Rogers said. “And as interest rates come down that impact will fade, and consumption will gradually pick up.”

Rogers’ remarks come just a few days after Canada Mortgage and Housing Corp. (CMHC) released its fall report, which showed nearly 1.2 million fixed-rate mortgages are up for renewal next year, most at higher rates. CMHC maintains that the mortgage renewal cycle remains a risk to the economy, as delinquencies are expected to increase.

The housing agency said Canada’s mortgage delinquency rate rose to 0.19 per cent in the second quarter of this year, but remains below the 0.28 per cent reported pre-pandemic.

Rogers maintained that Canadians have a long history of paying their mortgages, pointing to the 2008-09 financial crisis, when Canada’s mortgage arrears rate never went above 0.5 per cent.

“Given our recent experience, it’s a good time to reflect,” Rogers said. “And even if the economy is getting back to something approaching normal, we’re still expecting a future with more economic volatility and generally higher interest rates than we saw over much of the past two decades.”

• Email: jgowling@postmedia.com

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