By Introducing Forty Year Amortization, can the Canadian Government Fight Inflation and Stop a Real Estate Crash

Seventy-eight per cent of Canadians currently have a mortgage with an interest rate below 3.0%. Rising mortgage rates mean that the average Canadian needs to make a staggering additional payment of $800-$1100 per month for a mortgage of $800,000. This places enormous pressure on already strained households grappling with relentless inflation and rising costs of living – everything from higher gas and grocery prices to inflated hydro bills and property taxes.

Homeowners and the real estate market will feel the burden of this jarring payment increase for at least the next five years. If our government doesn’t act soon, the effects could be disastrous and result in a major real estate crash in Canada, wiping the home equity and retirement savings of millions of Canadian homeowners across the country.

The solution is simple: Canada needs to introduce 40-year amortization. The government should allow homeowners who currently have an existing mortgage to renew their mortgages up to 40-year amortization. When we look at the data and the realities of the market on the ground, this could be the best solution we have available.

The fact is that the Canadian real estate market is healthy and strong, with very good fundamentals. Canada’s labor market remains exceptionally robust: workers’ wages are increasing, and our national unemployment rate in September was at 5.2 percent, while labour shortages have resulted in one million job vacancies nationwide.

To better understand how introducing 40-year amortization will help prevent a real estate crash, let’s take the example of Steve, a Canadian homeowner who has a $100,000 mortgage with a 2.5% interest rate and a 25-year amortization.

Steve is currently making monthly payments of $447.97, but that payment will jump to $581.61 at the current 5% interest rate with the same 25-year amortization, when his mortgage comes up for renewal in December. That is a significant $133.64 payment increase, on top of the tremendous financial strain caused by inflation and rising costs of living.

On the other hand, a $100,000 mortgage with a 5% interest rate and 40-year amortization would require a monthly payment of $478.81. This is only an increase of $30.84, which is significantly more tolerable and manageable.

Steve represents the 95 per cent of Canadian mortgage holders who have mortgages with terms that renew every 6 months to 5 years. Sooner or later, our homeowners must renew their mortgages at the current high rates. If we don’t change course, many Canadian homeowners will buckle under the weight of unaffordable mortgage payments and runaway inflation within a few months, once these mortgages are up for renewal.

Many people will have no choice but to put up their home for sale well below what they owe to the banks and the mortgage companies. This would also be terrible for CMHC and other insurance companies since they would be facing mountains of claims from the banks and mortgage lenders for these defaults.

Real estate is the biggest asset class that most Canadians have and thus it is critical that the Government protects it, in order to ensure the future of Canadians and safeguard their retirements and personal wealth. If our government doesn’t act soon, it could result in a real estate crash in Canada within the next 12-30 months, wiping the personal balance sheets, home equity and retirement savings of millions of Canadian homeowners across the country.

If the Minister of Finance allows the 40-year amortization through the OSFI and CMHC, this will offer Canadians a great and needed relief from higher payments without harming anyone or costing the government any money. It essentially gives homeowners more time to pay off their debt, while also allowing the government to tackle inflation. This policy would not apply to new purchases, only for Canadians holding existing mortgages, so that the new amortization length for existing homeowners would not heat up the real estate market.