Extended Mortgage Amortizations: Fueling Canada’s Housing Bubble and Moral Hazard

Mortgage amortizations, which allow debtors to extend their repayment terms, have bolstered the thriving Canadian real estate market. Concerns have been expressed, however, regarding the possible consequences of this practice. Recently, the Office of the Superintendent of Financial Institutions (OSFI), Canada’s bank regulator, acknowledged that removing the ability to extend amortizations could result in downward pressure on property prices. This article investigates the effects of protracted mortgage amortizations on the housing market, the risk of moral hazard, and the implications for both borrowers and investors.

An important trend in the Canadian real estate market is the growing prevalence of mortgage amortizations exceeding 30 years. Major financial institutions, including BMO, CIBC, TD, and RBC, have reported that a significant portion of their mortgage portfolios have at least 30 years remaining on the repayment term. This increase in extended amortizations has been criticized for artificially supporting home prices and creating moral hazard by permitting overleveraged debtors to continue carrying excessive debt without adequately covering the interest.

The Office of the Superintendent of Financial Institutions (OSFI) recognizes that protracted amortizations contribute to elevated property prices. In response to questions from the Standing Committee on Finance of the House of Commons, OSFI stated that removing the ability to extend amortization periods could have a negative impact on home prices. By restricting the options available to debtors for meeting their financial obligations, this action could affect home prices. The ability to extend repayment terms increases credit capacity, which contributes to price inflation.

The creation of moral hazard is one of the major concerns associated with extended mortgage amortizations. Lenders and policymakers inadvertently reward hazardous behavior by reducing the perceived risks for overleveraged borrowers. This undermines the concept of risk and encourages debtors to incur more debt than they can comfortably affordders and policymakers inadvertently reward hazardous behavior by reducing the perceived risks for overleveraged borrowers. This undermines the concept of risk and encourages debtors to incur more debt than they can comfortably afford. Those who acted prudently are at a disadvantage, as speculators and overleveraged debtors benefit from extended repayment terms and enhanced cash flow. This disparity creates a hazardous environment and exacerbates the housing crisis.

Extended mortgage amortizations primarily benefit investors, particularly speculative landlords. Low interest rates have enabled investors to outbid first-time purchasers for a significant portion of the new housing supply. These investors frequently acquire properties with negative cash flow, relying on extended repayment terms to reduce monthly payments. As interest rates rise, however, many investors find themselves in a severe cash flow deficit. By providing investors with accommodations such as prolonged amortizations, policymakers exacerbate the housing crisis while essentially rescuing investors.

Extended mortgage amortizations have been instrumental in sustaining Canada’s soaring real estate market. Concerns have been expressed, however, about the unintended effects of this practice. The Office of the Superintendent of Financial Institutions acknowledges that eliminating the option to extend amortization periods could have an impact on property prices. In addition, the prevalence of protracted amortizations creates moral hazard by rewarding reckless behavior and penalizing those who act responsibly. As policymakers navigate this complex environment, establishing a balance between sustaining the market and avoiding long-term hazards will continue to be a significant challenge.

Source: https://betterdwelling.com/canadian-real-estate-prices-propped-up-by-longer-repayment-bank-regulator/