Imagine buying a home and securing a single, steady interest rate for the next 30 years, keeping your mortgage payments predictable and consistent. If interest rates fall, you can refinance without major penalties. And if you choose to pay it off early? No problem.
This is how the typical mortgage works in the United States, a model that Canada is now considering adopting. The federal government’s recent fall economic statement hinted at exploring long-term mortgage options to make homeownership more affordable. Consultations are set to begin to assess whether these 30-year fixed-rate mortgages could be a viable addition to Canada’s housing market.
In Canada, mortgages are generally amortized over 25 years (sometimes 30), but they’re broken into shorter terms—usually five years or less. At the end of each term, borrowers must renew their mortgage under new conditions, which may include a different interest rate. Fixed and variable-rate options are available, with the latter fluctuating based on the Bank of Canada’s rate changes.
In contrast, the 30-year fixed-rate mortgage dominates the U.S. market. This type of loan offers homeowners a consistent interest rate for the entire term, with no need to renegotiate. Borrowers can refinance if rates drop, often with minimal fees, and most U.S. mortgages are fully open, allowing for early repayment without penalties. Canadian mortgages, on the other hand, are usually closed, which restricts early payments but offers lower rates.
Introducing long-term mortgages in Canada isn’t as straightforward as it might seem. Canadian lenders would need to adjust significantly to offer such products. Robert McLister, a mortgage strategist, points out that longer-term mortgages would likely come with higher interest rates to account for the increased risk lenders face over such a long period.
For instance, in the U.S., 30-year fixed rates hover around 6.6%, whereas Canadian fixed-rate mortgages are currently in the mid-to-low 4% range. Without government-backed mechanisms like those in the U.S., Canadian lenders would need to charge a significant premium to mitigate risks tied to economic fluctuations and borrower circumstances over three decades.
The U.S. mortgage market benefits from a unique system supported by government-sponsored enterprises, Fannie Mae and Freddie Mac. These organizations purchase mortgages from lenders, bundle them into mortgage-backed securities, and sell them to investors. This process provides liquidity to banks, enabling them to offer long-term fixed-rate mortgages without taking on excessive risk.
In Canada, no equivalent system exists. Lenders bear the full risk of holding long-term mortgages on their books, which is why shorter terms with periodic renewals are the norm. Shubha Dasgupta, CEO of Pineapple Mortgage, notes that without a system like Fannie Mae or Freddie Mac, Canadian lenders would have to charge much higher rates to hedge against potential risks.
While the stability of a 30-year fixed-rate mortgage might appeal to some Canadian homeowners, the higher associated costs could deter many borrowers. Dasgupta suggests that even if these mortgages were introduced, they would require involvement from the Canada Mortgage and Housing Corporation (CMHC) or other insurers to offset lender risks.
Additionally, the penalties for breaking such a long-term mortgage early could be significant, especially within the first five years, making them less attractive to borrowers who value flexibility.
Canada’s shorter mortgage terms do have their advantages. They allow homeowners to adapt to changing interest rate environments more frequently and avoid locking into high rates for decades. Renewals also provide lenders an opportunity to reassess a borrower’s financial situation and adjust terms as needed.
Ultimately, adopting a U.S.-style mortgage system in Canada would involve a trade-off between stability and cost. While the idea of locking in a rate for 30 years might seem appealing, the reality is that the Canadian system’s shorter terms often strike a balance between manageable costs and flexibility.
For now, Canadian homeowners might be better served by the current system, which offers some protection from drastic market shifts while keeping interest rates relatively affordable. As consultations progress, it remains to be seen whether long-term mortgages will find a place in Canada’s housing market, or if the five-year term will remain king.
