Poloz calls for mortgage diversification
Mortgages are at the heart of our banking system, and when you think of the heart of our personal balance sheets, it is also mortgages. For banks, mortgages are their bread and butter and for many Canadians taking out a mortgage to buy a home, it is the biggest final decision they will ever make.
Banks are in great shape and well-capitalized. And the delinquency on mortgages is incredibly low, but as Bank of Canada Governor Stephen Poloz said in a speech Monday that focused on the future of mortgages: “Just because it ain’t broken doesn’t mean don’t fix it.” Sometimes you change in life before you have to and, in my opinion, this is where Poloz was coming from.
The first thing that often comes to mind when there is a Bank of Canada interest rate announcement is what sort of impact will it have on borrowers, the housing market, and the risk to lenders if Canadians living close to the margin default on their mortgage payments?
These are tough questions and there aren’t easy answers. We don’t have one mortgage market in Canada, there are several regional markets, but nationally, mortgage lending guidelines are the same, yet the “froth” in markets such as Vancouver and Toronto has clearly been evident. Now to be fair, the new mortgage guidelines that took effect early last year have helped and the quality of mortgages have improved. Canadians are saving more and have more financial flexibility. The stress test is designed to ensure new borrowers can still handle their mortgage payments even if their circumstances change, such as a decline in income or a modest interest rate increase. But are we going far enough? Maybe not.
I was intrigued by the idea outlined in Poloz’s speech to diversify mortgage duration. Financial institutions offer fixed-rate mortgages that are longer than five years. But 45 per cent of all mortgages are fixed-term with a five-year duration. In comparison, just two per cent of all mortgages issued last year were fixed rate with a term longer than five years.
Sure, longer-term mortgages will cost the borrower more, but in a job market where there is less stability, lower paying positions, contract workers etc., it is worthy of exploring longer duration mortgages, fewer renewals, less risk for a slightly higher premium. I would argue you need to do the math. What is the risk return trade off? Are you willing to pay more for peace of mind?
At the very least, financial institutions should be encouraged to have the conversation with potential homeowner. And this is an important conversation to have, because the one that does it best has a greater chance of increasing the level of customer satisfaction. A battleground for banks.
According to J.D. Power Canada’s latest survey, banks are losing appeal with younger customers – those under the age of 40 who are becoming more digital-centric but who are very vital to future business growth. Products and fees are important but we can’t underestimate the importance of frequent communication that is relevant.
What could be more relevant than a conversation around such an important financial decision – your mortgage.