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News & Updates

Flaherty calls on banks to ‘fix' mortgage market

Canada's finance minister said on Wednesday he would rather not tighten mortgage rules again to curb high household debt and that banks themselves are taking on that job by becoming more strict with their lending criteria.

Jim Flaherty said he has seen signs of moderation in the Toronto condominium market and expects to see a similar trend in Vancouver, one of the country's hottest real estate markets.

"Part of that is based on what I'm being told by people who build condominiums, and also what I'm being told by some of our banks about their standards becoming more stringent with respect to their loans for condominium development," Flaherty told reporters in Vancouver after making a speech there.

Flaherty said it was up to markets to "fix" the housing and debt problem, not the government.

"I've tightened up the mortgage insurance market three times ... I really don't want to do it again," he said.

"And I'm glad that some of the banks - at least one of the bank executives yesterday indicated that he ageed that actually the banks should exercise prudence and not rely on government to do it for them," he said.

Bank of Nova Scotia Chief Executive Rick Waugh said on Tuesday that the simmering housing market gives reason for caution, but that it's up to the country's banks, rather than the government, to manage the risks of their massive mortgage portfolios.

Several other bank executives - Toronto-Dominion CEO Ed Clark in particular - have said they would welcome further government moves on mortgages.

The government and central bank have been warning Canadians of the dangers of taking on too much debt, particularly through mortgages, at a time of historically low interest rates and high housing prices. The ratio of debt to personal disposable income hit a record high last year and has moderated somewhat since then.

Despite some resemblance to the U.S. housing market prior to the crash, most economists expect a soft landing in Canada.

Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget last week, to the surprise of many.

The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Flaherty said the banking regulator, the Office of the Superintendent for Financial Institutions, was studying the matter.

The 10-year versus 5-year mortgage: Which is better? 

The Financial Post asked several people in the industry to pick between a five-year and 10-year mortgage. Here are their opinions:

“If I could get a 10-year at 4%, I would take that all day long. I said to my wife ‘let’s just go get a mortgage’ and she said ‘we don’t need a mortgage.’ I said ‘it’s 10-year at 4%.’ Interest rates will go up, we all know that, we just don’t know when. Give me 10 years and I think I’ll get it right,” says Mr. Johnston. “It’s unheard of to lock in money for 10 years at these rates. It’s not going to last long.”

Ted Rechtshaffen, certified financial planner with TriDelta Financial, says he just had the debate with a client and, based on his math, if you think rates are going to be higher than 4.7% in five years you should lock in for the 10.

“If you can do a five-year mortgage at 3.14% or a 10-year at 3.89%, the renewal rate is going to have to be lower than 4.7% for you to be mathematically better off doing five years as opposed to 10,” says Mr. Rechtshaffen. “It’s not going to take a lot to get to 4.7% in five years, that’s a historically low rate. I would suggest the odds are good you are going to have a mortgage rate that is 5% plus. My client was also asking about investment property and, to be able to lock up the investment rate risk for 10 years, that has considerable value.”

John S. Andrew, adjunct assistant professor at Queen’s University’s School of Urban & Regional Planning & School of Business
Queen’s University, is leaning towards the 10-year.

Doug Porter, deputy chief economist with Bank of Montreal, says it’s a close call but he’s leaning towards a five-year mortgage.

“It’s a tight decision between the five and the 10. They are both exceptional offers. Purely as an economist, I have a gone through what we would have to assume for the Bank of Canada on medium term rates and it’s a close call. For someone who does have a lot of financial flexibility, that certainty is a good thing. There is an outside risk the global economy could be hit with an inflation check in the next 10 years given the huge amount of government debt outstanding and today’s rates will look laughingly low. Based on a traditional outlook, the five is slightly superior.”

Vince Gaetano, principal at Monster Mortgage and a long-time proponent of variable rate mortgage rates, is a convert to the 10-year.

“The product itself is no longer just a product, it’s a plan and a strategy to get rid of debt,” says Mr. Gaetano. “People should strongly consider taking on a 10-year product, especially individuals maturing from the 2007 market and who are coming out of 5.1% to 5.7% products. Keep your payments based on the same rate and take a 10-year and your mortgage will drop in half by the end of the term.”

“While there is potential for interest rates to rise over the five-year term of the mortgage, they would have to rise significantly for me to have been better off potentially overpaying during the first five years of a ten year term. That being said, choosing the ten year rate is essentially buying insurance and peace of mind, which is a valid option for many Canadians,” says Mr. Golombek.

Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank sounded a little torn on choosing between the two terms.

“You have to understand whether that home is something you are going to look to live in for the long haul,” says Ms. Haque. “The rates are in your favour if you want to live somewhere for the long haul and you want to budget around your income. The 10-year could make sense. If you feel you are going to be moving and your life may be changing, you consider the five-year.”

Michael Polzler, executive vice-president, RE/MAX Ontario-Atlantic Canada, didn’t pick between the two but says long-term mortgages have taken over the market.

“While variable rate financing has been the favourite child of real estate consumers to date, longer term, locked-in mortgages can provide greater peace of mind for homebuyers who can’t afford an upward spike,” said Mr. Polzler. “Today’s five and 10-year closed terms, available at unprecedented rates, are ideal for purchasers who want the security of a fixed monthly payment. For those considering this option, the timing has never been better.”

Moshe Milvesky, professor at York University, think the ultimate question of whether to go five or 10 years needs to considered in the light of your overall finances.

“In these extraordinary economic times, I believe that history is less relevant for the purpose of forecasting or projecting future interest rates. Indeed, the volatility of short-term rates in the last few years has been close to zero. But it would be ridiculous to extrapolate that volatility is dead. If anything, the risk of a ‘pop’ in rates is ever growing,” says Mr. Milevsky. “I believe that Canadians should first and foremost take a comprehensive approach to what I like to call ‘debt allocation.’ The type of debt you take, its maturity, quantity and flexibility should be determined in conjunction with the rest of your personal balance sheet. Period.”