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Economic Viewpoint

In Short Supply: Long Mortgage Terms

May 13, 2024
Jimmy Jean, Vice-President, Chief Economist and Strategist • Tiago Figueiredo, Macro Strategist

Canada seemingly avoided an outright recession in 2023, but aggressive post-pandemic monetary policy tightening has led to a significant increase in Canadian households’ debt servicing ratio, placing it among the highest in advanced countries.

Canada’s mortgage structure, which focuses on short-term, renewing mortgages, has limited options for protecting against rising rates. This likely exacerbated the payment shock.

Our analysis shows that if the option to lock in 10‑year mortgage terms had been more prevalent and attractive, the payment shock would have been more manageable for households opting for it. A 10‑year mortgage term would also make the stress test less necessary.

But to make longer-term mortgages more prevalent in Canada, several obstacles will need to be overcome. These range from outdated legislation governing prepayments, an underdeveloped private-label mortgage securitization system and limitations on covered bond issuance.

These constraints have been recognized for some time, but the pandemic halted the Bank of Canada’s initiatives to unite stakeholders around this issue. In our view, advancing this agenda has become more critical than ever.

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