Earlier this month, Bank of Canada Governor Stephen Poloz called on banks and other lenders to start pushing longer-term mortgages. Last week, HSBC responded by offering a record-low 10-year fixed rate of 2.99%.
That means the peace of mind of knowing mortgage payments won’t change for 10 years can be had for just a quarter-point premium above HSBC’s own 5-year fixed rate special.
In a recent post, RateSpy.com’s Rob McLister called HSBC’s 2.99% 10-year fixed rate offer “simply remarkable.”
But despite the competitive pricing for long-term rate stability, he cautioned that decade-long mortgages still aren’t for everyone, especially if 5-year fixed rates continue to fall.
While someone with a 10-year fixed rate could switch into a lower 5-year rate should rates drop, that would entail penalties—three months’ interest if the switch is made after the first five years of the 10-year mortgage, or a more onerous interest rate differential (IRD) penalty if the mortgage is broken in the first five years.
“That risk, and the small market-implied odds of meaningfully higher rates in five years, are largely why 5-year mortgages still have the edge over 10-year terms, for most people,” McLister wrote.
In a previous interview, Ratehub co-founder James Laird told Canadian Mortgage Trends that 10-year rates are most suited for those who are most risk-averse, as it allows them to set their budget over a longer horizon and reduces the risk of renewing into higher rates, given that renewals are more frequent with shorter mortgage terms.
“The 10-year fixed rate is an insurance policy, so if you’re really, really concerned about rates rising, and really want to take the risk out of your borrowing, it’s that type of consumer,” he said. But he noted that BoC Governor Poloz himself indicated that rates weren’t likely to make any major moves for an extended period of time. “That is not a good reason to go with a longer term. That’s justification for taking a variable rate or a short term.”
IMF Weighs in on Canada’s Stress Test
The International Monetary Fund (IMF) has weighed in on Canada’s housing market, saying it would be “ill-advised” to stimulate housing activity by easing the mortgage stress test.
In a report released by IMF staff this week following an official visit to Canada, the IMF noted the government has been under pressure to “ease macroprudential policy or introduce new initiatives” that would support increased housing activity.
“This would be ill-advised, as household debt remains high and a gradual slowdown in the housing market is desirable to reduce vulnerabilities,” the report reads.
Last week, Conservative Party leader Andrew Scheer said he would eliminate the stress test on mortgage switches at renewal, and consider re-introducing 30-year amortizations for insured mortgages if his party is elected in October.
Research released last month by TD Economics estimated that the B-20 regulations (stress test) resulted in 40,000 fewer home sales in 2018. Similar research from Benjamin Tal, CIBC’s Deputy Chief Economist, estimated the stress test is responsible for an 8% decline in new mortgages started in 2018, translating into a $15 billion drop in lending activity.
Meanwhile on Thursday, CMHC CEO Evan Siddall said the stress test is “doing what it is supposed to do,” he wrote in a letter dated to the Standing Committee on Finance.
“The mortgage stress test is exactly the kind of policy we need to protect our economy,” Siddall wrote, saying calls from industry groups such as Mortgage Professionals Canada, the Canadian Home Builders Association and the Ontario Real Estate Association to ease the stress test would add to housing demand and price inflation of 1-2% in the larger cities.
“My job is to advise you against this reckless myopia and protect our economy from potentially tragic consequences,” he said.
CIBC: Housing Supply Estimates are 300,000 Homes Short
It appears the housing supply gripping certain markets is more serious than originally thought due to the way statistics are compiled by Statistics Canada.
CIBC spotted the issue with Canada’s last census, which counted students who live away from home—but who return home with their parents during the summer—as living full-time with their parents.
That census data is used by the Canada Mortgage and Housing Corporation (CMHC) to generate estimates of housing demand, which in turn are relied upon by those in the housing industry, such as developers, to determine housing supply needs.
“If you are Statistics Canada, this approach makes sense, since you are interested in the number of permanent households and therefore excluding students (domestic and foreign) that plan to return home…seems logical,” wrote Tal.
“[But] if we are undercounting young people, and most of them are renting, then we have to increase rental supply,” he noted.
Due to a lack of Canadian data, Tal used U.S. data on the percentage of students who live away from home during the year to arrive at the estimated Canadian housing shortage of 300,000 units.
“Given that almost all the undercounting is among young students, and that their number has been rising much faster than the overall population, the relative impact on growth in housing demand is notable—predominantly in cities with major post-secondary schools,” Tal added.