Canadian homeowners and financial institutions have been well-served by our mortgage market, but making it more flexible and sharing the risks involved in home loans could benefit borrowers, lenders and investors. In his speech in Winnipeg, Governor Poloz talks about housing markets in Canada and explains how innovation could improve the mortgage market.
Housing sector still adjusting
Overall, the housing sector should return to growth later this year. Recent changes to provincial and municipal housing policies, mortgage lending guidelines and interest rates are working their way through the market. The situation is different across Canada:
- Areas with elevated house prices, including Toronto and Vancouver, are expected to stabilize.
- Housing market weakness in Alberta and Saskatchewan is tied to the ongoing adjustment to the 2014 oil price shock.
- Resale activity has been solid in other markets, including Halifax, Moncton, Montreal, Ottawa and Winnipeg.
Mortgage market flexibility could improve choices
While financial institutions have added new ways to sell home loans and give Canadians access to home equity, the actual mortgage product itself hasn’t changed much over time.
Given how different regional housing markets are, it is worth looking to see if our mortgage market could increase the ability of consumers, lenders and the economy to adjust to shocks.
We could look at ways to develop a more flexible mortgage market that gives more choice to customers, lenders and investors, while making the market safer and more efficient.”Stephen S. Poloz, Governor
Looking beyond the 5-year mortgage
Nearly half of Canadian mortgages have a fixed interest rate and a five-year term. While it is a popular choice, there are good reasons to encourage more longer-term mortgages:
- Consumers would face the risk of higher interest rates less often.
- More equity would be built up by homeowners between renewals.
- Fewer loans being renewed each year can contribute to a safer financial system and more stable economy.
Innovation in funding and design
Changing mortgage products could mean lenders change the way they fund or design the home loans they offer to Canadians. Governor Poloz outlined two possible changes:
- While traditional funding has relied on government-supported mortgage backed securities, a private mortgage-backed securities market could be a more flexible source of funding, particularly for smaller lenders.
- Mortgages could be redesigned so that borrowers and lenders share the risk that the price of a home will decline.
A strong past, a better future
Canada’s mortgage market has worked well in the past, and recent changes to mortgage guidelines have helped improve the quality of new mortgage debt. The Bank of Canada wants to encourage a safe and efficient financial system that evolves to foster resilience and allow people to make the choices that are right for them.
More choice for borrowers and more ways for lenders to diversify risks are desirable. To be clear, the system is not broken—it has served Canadians and financial institutions well. But we should not stop looking for improvements.”Stephen S. Poloz, Governor