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Changing amortization, cap on insured mortgages not the answer to affordability: CMHC

The head of Canada's housing agency says measures such as extending mortgage amortizations and changing the threshold to qualify for an insured mortgage are not the answer to the country's housing affordability challenges.
Chung Chow

The head of Canada's housing agency says measures such as extending mortgage amortizations and changing the threshold to qualify for an insured mortgage are not the answer to the country's housing affordability challenges.

Even though homeowners have seen a rapid increase in what they are paying to cover mortgages as interest rates have risen, Canada Mortgage and Housing Corp. president and chief executive Romy Bowers is not in favour of allowing borrowers to repay their mortgages over longer periods of time.

"That just makes credit more available," she told The Canadian Press. "It lowers the monthly payment, but it actually increases the cost to the homeowner over time."

Under Canada's current regulations and lending standards, borrowers must pay down their mortgage over a maximum 25 years if their down payment amounts to less than 20 per cent of the home's purchase price.

However, a borrower whose down payment is at least 20 per cent of the purchase price can have a maximum amortization period of 30 years.

Proponents of longer amortization periods argue they give borrowers more flexibility and helps them balance their monthly budgets. Critics counter that a longer amortization means higher interest costs over the mortgage's lifetime, which means you build home equity more slowly.

"What I worry about is sometimes that seems like a quick fix," said Bowers, of the possibility of extending amortizations.

"If you just have 30-year amortization everyone's mortgage payments will go down by $200 and they can actually afford the house, but if you're in a supply-constrained market and that's your solution, it's not going to solve the problem in the long term," she said.

CMHC says the focus right now must be on increasing the number of available homes, since a shortage is what's driving prices higher.

"What you need to do is make more supply and make it a more balanced market and have more housing at different price points, so that people don't have to spend so much money on mortgage debt."

Bowers' view is partly based on what happened in the U.K., where the government introduced a program that gave first-time homebuyers in London "generous" down payment grants.

When the program was later assessed, Bowers explained, they found the prices of starter homes had gone up by the exact amount of the government subsidy, essentially wiping out any affordability gains.

Similarly, she said, extending amortization "is not a winning formula because it drives up house prices."

The start of the year saw previously roaring demand dampen in the housing market as borrowing costs rose, but Canadians have begun moving off the housing market's sidelines, driving up prices once more.

The Canadian Real Estate Association reported last week that the actual national average home price reached $729,044 in May, up 3.2 per cent from a year earlier, while the seasonally adjusted average home price was $715,290, up 2.7 per cent from April. 

The average topped $1 million in the Greater Toronto Area and several parts of B.C.

"Spurts of new listings across the country eased demand-supply conditions in the majority of markets last month, but not enough to tip the scale in favour of buyers," RBC's assistant chief economist Robert Hogue said in a note to investors last week.

"In fact, sellers continue to hold the stronger hand at this point, which is why prices have been appreciating lately."

Bowers, who took over the top CMHC job in April 2021, would like to see affordability improve. She says it will take several levels of governments working together to quickly create more purpose-built rentals and other types of homes that are in-line with buyers' demands.

Many potential solutions have been bandied around, but she maintains more supply has to be the star.

However, she's keeping an eye on the state of mortgages, which have become more costly as home prices, mortgage and interest rates crept up in recent years.

There is also a limit on mortgage default insurance, which is not available on homes costing more than $1 million.

CMHC's insurance book has little exposure to Toronto and Vancouver, where home prices are highest. 

"If the role of the mortgage insurance system is to provide coverage across all of Canada, then is the million-dollar cap a barrier and what needs to be done?" she said.

"But I don't view the change in that as a magic solution to the housing affordability issue."

This report by The Canadian Press was first published June 19, 2023.

Tara Deschamps, The Canadian Press