Finding balance in the mortgage market

Senior Deputy Governor Carolyn Rogers talks about Canada’s mortgage market and how it has evolved over time.

The high cost of housing

Although inflation is back to target, the cost of many goods and services remains higher than before the pandemic. Whether you rent or own, housing costs are a big part of this.

For those who carry a mortgage, the elevated interest rates that were needed to cool inflation will mean increased payments when at renewal time. So, over the next two years, many Canadian households will renew their mortgage rates that are higher than their rate.

The Bank of Canada is looking closely at this from two perspectives:

• From a monetary policy perspective, people who are spending more on shelter costs may cut back on other spending, which will slow the economy.
• From a financial stability perspective, higher mortgage payments could stress households and lead to greater losses for financial institutions and mortgage insurers.

While we don’t expect these risks to materialize, we need to keep an eye on them.

It’s a balancing act

A healthy mortgage market balances the interests of three groups:

• borrowers
• lenders
• investors

Borrowers look for lower payments and greater flexibility, so they may be interested in:

• longer terms
• caps on interest rates
• prepayment options

Lenders and investors want a good rate of return on their investment, so features that help borrowers might be less attractive to lenders and investors.

But it’s not just the interests of these three groups that need to be balanced—we also need to balance the risks. And that is a delicate process.

Canada’s mortgage market has evolved and grown since the federal government started getting more involved in it back in the 1930s. Since then, various agencies have introduced safeguards to address the fallout from events like the US mortgage meltdown and the 2008–09 global financial crisis.

But any changes to the way we approach mortgages could upset the balance of risks for some or all of Canada’s mortgage market participants.

There’s no quick fix

Our system has worked well. People can access credit to buy a house, and our mortgage default rates are much lower than those of other advanced economies. We can look to other countries for inspiration about how to make our mortgage market work better. But we need to remember that there’s no such thing as a simple change in the mortgage market.

And changes to the mortgage market won’t fix housing affordability. That requires addressing the long-term imbalance between low supply and high demand for housing in Canada.