10 Year Mortgages: Do They Benefit The Consumer?
As a consumer, would a 10-year mortgage interest you? More importantly, would it benefit you?
Today, in Canada, only 2% of the market carry longer term (more than 5 years) mortgages. They are definitely available but only a few lenders offer longer term mortgages.
A recent report by Michael Feldman published by the C.D. Howe Institute called, “One More Case for Longer-Term Mortgages Financial Stability” — encourages longer-term mortgages.
In it, Mr. Feldman stated:
“…If borrowers wanted to lock in interest rates that are currently at historical lows, why do longer-term mortgages only represent 2 percent of the market? I am not aware of any studies that have been done to explain this, but I suspect that the reason borrowers are not asking for longer-term mortgages is the same reason that when they go to a restaurant they will not think of ordering a dish that is not on the menu. A customer who is a frequent patron of a restaurant may be familiar enough with what the chef is capable of preparing and so may order something other than what is offered on the menu. However, a borrower who only deals with their lender or mortgage broker once every few years at mortgage renewal time is unlikely to choose an option that is not being offered. So I believe that one of the most important influences on the demand for longer-term mortgages is the willingness of lenders to supply longer term mortgages.“
The report goes further in examining factors that can be taken to encourage longer-term mortgages. Read the full report here.
Let’s look at it another way…
Ron Butler, Founder of Butler Mortgage, does not favour longer-term mortgages. He highlighted certain parts of the report and explained why longer term mortgages will not work.
In order to significantly change the dominant custom in Canada of residential mortgages being five years or less, the federal government would likely have to provide inducements to borrowers and lenders, as well as amending certain regulatory practices. The report recommends:
Amending section 10 of the Interest Act to provide that so long as a borrower under a residential mortgage was given a short term prepayment right in respect of their entire mortgage at least every five years, then this prepayment right did not have to remain open indefinitely after the first five years of the mortgage.
“Wisely, previous governments realized that 10 year terms had an inherent danger in that if interest rates should drop to the point it would be attractive to consider breaking a mortgage and switching, the consumer might be stuck in the high 10-year term because penalties based on Interest Rate Differential (which is true of all Fixed Rate Mortgages) would be extremely punitive. Hence, the law insisted the penalty in the second 5 years of a 10-year is barely anything even though the penalty in the first 5 years is very high,” Mr. Butler explained.
He continued, “Let’s consider the essential “reason” that CD Howe Institute gives for the promotion of 10-year mortgage concept. Their thesis is that there is a definite danger to consumers that rates may increase on a 2-year or 3-year or 5-year term mortgages may actually default if their rates jumped more than 1.5% or 2.00% on renewal.”
“This is the same reason the government introduced the mortgage stress test in 2016. Interestingly, since the introduction of the stress test, rates have only risen about 50 basis points and defaults based on rate increases at renewal are ZERO throughout this industry. You can check this fact with the mortgage insurance companies: Genworth, CMHC and Canada Guaranty.”
So, what’s the bottom line regarding if 10-year mortgages benefit the consumer?
Mr. Butler outlined this…
With 10-year mortgages:
- Rates are higher
- Penalty is much higher
- Mortgage is not paid off as fast (because rates are higher)
- Flexibility is reduced (cannot rethink your strategy at year 2 or 3 or 5 because you’re stuck)
“So the only case it benefits the consumer … is POSSIBLY, if rates go up. And, for the last 30 years, that is a losing bet.”
What are your available mortgage options?
At Butler Mortgage, we offer a no-fee, no obligation mortgage approval and mortgage quote that help simplify the entire process. We do a lot of the heavy lifting, shopping and contacting multiple lenders on your behalf. And, we can do all of this over the phone.
If you are in the market for a home purchase, mortgage renewal, mortgage refinancing, debt consolidation, CONTACT US any time and let’s start the discussion.