Canadian homeowners learned the hard way that five-year mortgage terms can turn a routine renewal into a household emergency.
That came after Canada’s benchmark prime rate nearly tripled from 2022-23 — the steepest proportional jump on record. And while most American borrowers shrugged off U.S. hikes, given their 30-year rate locks, Canadians absorbed the full impact.
In fact, mortgage default rates are still climbing today because of it.
But what if it didn’t have to be that way? What if long-term payment security was possible, at reasonable
interest rates
?
Experts have talked about this idea for years because, in theory, it just makes sense. You want people to have economical options to manage interest rate risk. Every regulator in Canada would agree.
So why isn’t our government doing anything about it? One reason dominates: The leap from endless talk to actual action requires effort.
But almost nothing good in life is easy, so that’s no excuse.
It’s time to stop talking about it and push this initiative forward, Mr. Prime Minister, Mr. Housing Minister, Department of Finance, OSFI, Bank of Canada, CMHC and anyone else with a role to play.
Why 10-year mortgages matter
Back in 2019, former Bank of Canada governor
Stephen Poloz
said in
, “As a policymaker, I see how longer-term mortgages can contribute to a safer financial system and more stable economy.”
Speaking to me today, Poloz conveyed the same. “I haven’t changed my mind about any of this,” he said. “American households enjoy a much more stable financial setting given their 30-year terms.”
Yet fewer than one in 100 Canadian borrowers choose 10-year terms — they simply cost too much.
And it’s a chicken-and-egg situation because we need lower funding costs to get more people interested. But we need more people interested to achieve lower funding costs.
Practically speaking, cheap 10-year mortgages are as long as we can hope for. Thirty-year funding costs too much in Canada, and most 30-year borrowers in the U.S. exit in an average of seven to nine years anyhow.
What must change
To make cost-effective 10-year mortgages a reality in Canada, at least five things must happen:
We must rewrite the law
The out-of-date Interest Act, which dates back to the crusty old 1800s, caps mortgage prepayment penalties at three months’ interest after five years. This is far and away the single biggest reason we don’t have low-cost 10-year mortgages in this country.
Banks can’t price low when they must hedge the risk of early repayment.
“Almost 100 per cent of borrowers will pay out if rates go down and practically zero per cent will pay out if rates go up,” says True North Mortgage chief executive Dan Eisner.
“The Interest Act gives people a one-way option and banks don’t like one-way options — unless it benefits them.”
To address this legitimate lender risk, penalty restrictions must be lifted on 10-year terms, letting banks recoup losses from broken contracts and offer better rates.
Doing this would also attract capital from non-bank lenders, like pension funds and insurance companies, which love long-term 10-year assets with limited reinvestment risk. New entrants into Canada’s funding market would add liquidity and bring down rates even more.
We must mandate fair 10-year penalties
Coupled with the change above, the government must enact fair penalty rules on all terms beyond five years.
In other words, banks must be restricted to collecting 10-year indemnities based on their actual losses from you breaking your mortgage contract early.
Today, fixed-rate prepayment penalties are profit centres for the banks. In other words, they make more money from fixed-rate penalties than it costs them when you break early.
That borders on unconscionable in cases where 10-year borrowers must exit before five years. The reason being, 10-year penalties can be massive.
“One way to reduce risk for consumers would be to mandate standard calculations for fixed mortgage penalties,” Eisner says.
Side note: Many argue for fair penalties on all terms, but we must be careful what we wish for. If Ottawa prohibited today’s ridiculous Big Bank posted-rate penalties, banks would just build that lost revenue into their
mortgage rates
and we’d all pay more.
Our job here is to protect 10-year borrowers and kickstart a 10-year market, not solve all the world’s problems.
By the way, there are already plenty of alternatives in the five-year market to avoid penalties if you talk to a mortgage broker and choose the right lender.
Lenders need better securitization
Canada needs more liquid 10-year securitization for regular mortgages if we want any competition whatsoever.
Non-bank lenders I speak with say the Canada Mortgage and Housing Corporation (CMHC), which rules over mortgage securitization in this country, is too skimpy with its allocation of 10-year securitization for single-family residential mortgages. That must change.
But in CMHC’s defence, skimpy allocations largely reflect meagre consumer demand.
Where CMHC could add value is in doing a public good and reducing its 10-year Canada Mortgage Bond (CMB) guarantee fee, which is double the five-year fee. That’s despite the probability of borrowers changing their mortgage before 10 years is up.
(Explainer: CMBs are the number one way non-bank lenders compete with big banks. They are government-guaranteed securities backed by pools of already insured residential mortgages. They provide bank competitors with crucial low-cost funding and investors with safe, CMHC-guaranteed returns.)
Consumers need protections
The government would need to convince lenders to offer reasonable flexibility to 10-year borrowers.
It would be contingent on the borrower qualifying, of course, but regulators would need to encourage banks to offer penalty-free portability, port-and-increase options (in case someone needed to increase financing in order to buy a new home) and secondary financing (where you could add a second mortgage or HELOC with the same lender without penalty — again, subject to qualification).
Tweaks would be required to securitization programs to support such flexibility, particularly for smaller non-bank lenders.
Lenders would further benefit from 10-year securitized mortgages because they wouldn’t have to pay low-ratio insurance fees again when borrowers switch from other lenders.
Moreover, 10-year lenders wouldn’t have to worry as much about losing customers after five years.
There needs to be a carrot
For demand to create economies of scale, borrowers need more incentive to take a 10-year mortgage.
One way to do that is to soften or eliminate the federal mortgage stress test on 10-year loans, meaning that borrowers would simply need to prove they can afford their contract rate.
Forcing 10-year borrowers to prove they can afford a rate that’s 200-plus basis points higher makes zero sense because there’s already long-term payment security.
Moreover, natural amortization would typically take a 95 per cent loan-to-value mortgage down to 71 per cent after ten years, affording borrowers plenty of refinance options.
OSFI (Office of the Superintendent of Financial Institutions) has already floated eliminating the stress test on uninsured mortgages, reasoning it may become redundant given its new loan-to-income rule, which curbs overleveraging.
“The stress test was always supposed to be context-dependent (and) evolve through time depending on the financial environment,” said Poloz. “Perhaps it is time to do a full redesign that contributes to financial stability in more than one dimension.”
Today, leading 10-year mortgage rates are roughly 85-plus basis points more expensive than leading five-year mortgages (i.e., 5.14 per cent versus 4.29 per cent).
The changes above might slash that difference roughly in half.
Reality check and what’s at stake
This author isn’t deluded enough to expect millions of Canadians to line up and pay 40-plus basis points more for a 10-year fixed. But a meaningful minority will, given the right circumstances.
That’s particularly true in cases where someone plans to keep their property long-term, or when rates are below the five-year average, or when payment certainty matters more than pinching every penny.
Back in 2021, a few players were hawking 10-year mortgages as low as 1.99 per cent. Leading five-year mortgages at the time were less than 1.25 per cent.
Had the 10-year market been liquid back then, decade-long mortgages might’ve been available for around 1.75 per cent or less, a rate today’s homeowners might trade a kidney and possibly a sibling for.
Rock-bottom long-term mortgages would’ve spared countless borrowers serious stress and tens of thousands in interest.
In the U.S., the majority of borrowers cheerfully pay more for 30-year rates versus five-year rates. Shrink the 10-year versus five-year spread, and plenty of Canadians would follow suit. After all, buying insurance has value in the right circumstances.
That’s why our government must act — now.
We live in a world with structural inflation, fiscal and trade risk. Politicians and policymakers need to shield folks from it with safer, more predictable long-term mortgages.
Without Ottawa taking action, investor indifference leaves us on a path of least resistance. And that puts far too much mortgage pricing power in the hands of the bank oligopoly.
Robert McLister
is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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