Canada has been hit hard by higher interest rates, with households facing soaring debt-servicing ratios. However, a new report by the Fédération des caisses Desjardins du Québec suggests that longer mortgage terms could have lessened the pain.
Since the Bank of Canada began raising rates in 2022, Canadian households have struggled with high debt-servicing ratios compared to other advanced economies. The report highlights that if longer mortgage terms had been more prevalent and attractive, the payment shock would have been more manageable.
Currently, Canada’s mortgage market is dominated by fixed-rate mortgages of up to five years, with longer terms being a small fraction of the market. In contrast, the United States offers 30-year fixed-rate mortgages, providing more stability for borrowers.
The report emphasizes that Canadian households, already among the most indebted globally, face additional challenges with the prospect of further rate hikes. The difference in mortgage systems between Canada and the U.S. has been cited as a reason for Canada’s economic underperformance compared to its neighbor.
To address these issues, the report suggests updating legislation on prepayments to support longer mortgage terms and developing a private-label residential mortgage-backed securities market. This would allow lenders to offer longer-term mortgages and provide more stability for borrowers.
Overall, the report underscores the importance of innovation in Canada’s mortgage market to better support households facing financial vulnerabilities. With the potential for inflation and further rate hikes, the need for longer mortgage terms has become more critical than ever.