Opinion: Fixed-rate mortgages need their rates fixed for longer terms

financialpost.com:

By Mary-Jane Bennett

Stubbornly high housing prices are one of the main reasons for the steep drop in young Canadians’ “sense of hopefulness,” according to Statistics Canada. Given the state of the market, their hope seems unlikely be buoyed anytime soon.

Last year, interest rates were the highest they have been in 22 years and inflationary pressures, especially shelter costs, remain strong. Together, inflation and interest rates are eroding Canadians’ purchasing power. Already, one in three mortgage-holders has been forced to stretch their amortization period beyond the standard 25 years, which means paying off the mortgage years later at higher cost. And longer amortizations contribute to higher housing prices, according to the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator.

To address the crisis, the Department of Finance should investigate whether Canada’s banks along with Canada Mortgage and Housing Corporation (CMHC), the agency that guarantees Canadian mortgages, are sufficiently buffered to offer longer-term fixed rates than the conventional five-year term held by most homeowners. With interest and monthly payments renegotiated every five years, what Canadian banks call a “fixed-rate mortgage” is really a variable rate loan with five-year resets. This provides much less risk protection than a long-term loan in which the interest rate and payment remain fixed for the life of the loan, which is the norm in the U.S. 

The evolution of the 30-year mortgage in the U.S. began as one of the major interventions following the Great Depression, in which mortgage terms as short as one-year and fully repayable had created an avalanche of foreclosures. New Deal laws allowed funding