Conservatives’ 7-10-year fixed mortgage maturities could hamper borrowers

With today’s federal election, the Conservative Party of Canada is committed to making homeownership more accessible by modifying the B-20 mortgage stress test and cultivating a stronger market for homeowners. seven to ten year fixed rate mortgages.

While the former is welcome, the latter comes with its own set of issues, said Dustan Woodhouse, president of Mortgage Architects, adding that these reforms could increase the number of buyers eligible for the loan, but also lead to higher prices. long-term housing. .

“It may allow more Canadians to enter the market because it gives them more purchasing power, but it does actually raise prices. If he does something, he puts more buyers in the market instead of more supply. There is no counterweight on the supply side, ”said Woodhouse.

The fact that the supply of housing does not increase in proportion to the demand is only the tip of the iceberg, he added.

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Under the Canada Interest Act, penalties for long term breaches are high. Since the average Canadian mortgage holder breaks the term in the third year, when the penalties are relatively low, borrowers who plan to do so with a fixed term of seven or ten years would be severely penalized. Tory leader Erin O’Toole did not say whether those sanctions under proposed Tory reforms would be less severe, Woodhouse said.

“The other problem with this proposal is that the seven and ten year mortgages both have massive, massive prepayment penalties,” he said. “In particular, in the third, fourth and fifth years, the penalties fall to three months interest at the five-year threshold, in accordance with the Interest Act. The worst I saw was on a 10 year fixed rate and customers paid an 11% penalty of the balance. It was a million dollar mortgage and their penalty was $ 110,000.

It is likely that the sanctions would ease because the Tory platform specified “create a new market”. Yet mortgage brokers rarely advise their clients to take out fixed-term mortgages this long, despite the fact that their brokerage fees would almost double to around 160-180 basis points.

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While offering longer terms on fixed rate mortgages would increase borrowing power by up to 10%, according to Woodhouse, increased demand from homebuyers in an under-supply environment could trigger more debt. bidding wars, pushing up housing prices further.

The Conservatives also promised to index mortgage insurance, currently capped at $ 1 million, to inflation, making homeownership less prohibitive. In addition, the party wants to eliminate B-20, which tests mortgages at 5.25% or 2% above the posted rate, whichever is greater, for borrowers who wish to purchase new mortgages from different lenders at the time. of renewal, Woodhouse mentioned. “A borrower could, in theory, shop around for a mortgage and get a lower rate than what he was paying. [They] could hire a broker to work for you and find it for you, ”he said.

Although the Canadian Real Estate Association and the Toronto Regional Real Estate Board have praised the federal parties for recognizing the housing supply crisis in Canada, there is near unanimous agreement that none of the proposals parties do not adequately address the supply in a meaningful way, especially in new towns lacking housing. like Toronto and Vancouver.

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“Bureaucracy is a big part of the problem,” said Christopher Alexander, strategy director at RE / MAX INTEGRA. “It takes a year and a half to get projects approved. It’s a lot of bureaucracy.

A study by the Ontario Home Building Council (RESCON) showed, for example, that Toronto’s rezoning process took six months in 2006, but a decade later it was already three years long and half. The study also found that site plan approvals take 18 months starting in 2016. Most industry estimates now indicate that it can take up to two years. The RESCON chairman said redesigning the entire system would address excessive delays.

“The current system, quite simply, is inefficient and needs to be modernized and digitized,” said Richard Lyall. “However, we are not even close to what is happening. Right now, there are too many government agencies and departments with all their fingers in the cake, which only bogs down the approval process. “

Bureaucratic hurdles within Toronto’s city administration are so pervasive that even getting a simple project like the City Council-approved Rail Deck Park project was so strewn with roadblocks that after two years the project is probably dead, Alexander said.

“The project was crushed because the city council and the approval committee failed to reach a consensus. You have a platform to change the dynamics of the city for green spaces, which is sorely lacking, and the bureaucracy has also opposed it, ”said Alexander.