Poloz calls for more options in mortgage products

Bank of Canada governor Stephen Poloz says it’s time for fresh ideas when it comes to Canadians’ mortgage options.

Poloz said in a speech Monday that changes could include encouraging loan terms longer than five years, the creation of a market for private mortgage-based securities and the launch of shared-equity mortgages for first-time home buyers.

More innovation would help boost flexibility for borrowers, lenders and investors, while also lowering risks in the financial system, Poloz said.

“To be clear, the system is not broken—it has served Canadians and financial institutions well,” he said in his speech to the Canadian Credit Union Association and Winnipeg Chamber of Commerce.

“But we should not stop looking for improvements and I invite all of you to join this effort.”

Poloz is making the recommendations as he monitors three key housing-market stories—the oil-slump-driven slowdown in Alberta and Saskatchewan, the steep drop in resale activity in Toronto and Vancouver following the introduction of stricter mortgage guidelines, and steady growth in many other parts of Canada.

Looking ahead, he said the overall Canadian housing sector should return to growth later in 2019 as the Vancouver and Toronto markets stabilize.

“The fundamentals of the Canadian housing market remain solid, and growth will resume once the effects of reduced expectations for house price inflation and the new mortgage guidelines have been absorbed,” he said.

In its spring budget, the federal government announced it would create shared-equity mortgages as a way to provide interest-free loans to help first-time home buyers add to their down payments. The plan, if implemented, would also encourage a lift in housing supply, Poloz said.

The government is expected to lay out more details on the proposal later this year.

Poloz said the plan would help make the financial system safer because mortgage risks would be shared between the borrower and the lender.

In another example, he suggested there should be more work to promote the merits of fixed-rate loans longer than five years. Only 2% of all fixed-rate mortgages issued in 2018 had durations longer than five years, he added.

For borrowers, longer terms would mean they would have to deal with fewer renewals, reducing the risk that they will face higher interest rates. Policy-makers would also benefit from the increased stability related to fewer renewals.

He said there’s some momentum in Canada towards the creation of a private market for mortgage-backed securities. Poloz said it would provide a more-flexible source of longer-term funding for uninsured mortgages, which are becoming more popular.

They would have to be designed carefully, he said, because mortgage-backed securities were central to the “sub-prime debacle” ahead of the financial crisis more than a decade ago.

Overall, he said there are many possibilities.

“Of course, there are many other possible variations on mortgage design, so many that it makes me wonder why so little has happened in our mortgage market in my lifetime.”