BoC Lays Groundwork for More Competitive 10-Year Fixed Rates
The Bank of Canada announced this week it will begin purchasing 10-year Canada Mortgage Bonds (CMBs), a move seen as paving the way for mortgage lenders to more easily offer lower-cost 10-year fixed mortgage rates to consumers.
This is the first time the Bank has purchased 10-year fixed mortgage bonds on the open market. Previously it has only participated in 5-year fixed and 5-year floating rate note issues.
“The Bank will continue to adhere to its principles of neutrality, prudence and transparency and conduct its transactions in a manner that limits market distortions and minimizes impact on market prices,” the BoC said in a statement, adding it held $517 million of CMBs as of Nov. 30, 2019.
Observers say the move will likely make 10-year fixed-rate mortgages more competitive and enticing to borrowers.
“This move should drop yields on 10-year CMBs slightly, resulting in lower 10-year fixed rates for consumers,” wrote Rob McLister, founder of RateSpy.com.
The Benefits of Longer-Term Mortgages
The move follows calls from Bank of Canada Governor Stephen Poloz for banks and other lenders to offer more innovative mortgage products, namely longer-term mortgages.
He argued previously that longer mortgage terms would “mitigate the normal risks in the system both for lenders and for borrowers.”
A recent report from the C.D. Howe Institute entitled “The Case for Longer Mortgages: Addressing the Mismatch between Term and Amortization” reached the same conclusion.
The benefit, of course, is that borrowers are less vulnerable to rising rates at renewal time with longer terms. Michael K. Feldman, a partner at law firm Torys LLP and author of the report, argues the greater diversity of mortgage terms would also help to make the overall market more stable.
Currently just 2% of mortgages in Canada have terms that are longer than five years.
As a result, the 5-year mortgage term is “too well-entrenched to be overcome organically without incentives or changes to laws or government policies and programs to encourage this development,” Feldman writes.
One way of encouraging demand would be to relax the stress test on longer-term mortgages, which already entail higher interest rates. For example, the stress test could be set at just 1% or less to reduce the qualification barrier, the report suggests.