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How do Canadians feel about the shorter term(5 years) available for fixed rate mortgages? I would think that shorter term would contribute a significant level

How do Canadians feel about the shorter term(5 years) available for fixed rate mortgages? I would think that shorter term would contribute a significant level of anxiety regarding one's future financial solvency.

kevin_nisbet 4y ago
I don’t know that I really count since I’m quite frugal. On my end I think the term mortgages are great since I believe it leads to lower overall interest rates. There’s a lot less risk that gets baked into the price that would be needed for longer terms. I know I’ve compared to other jurisdictions where interest seems way higher. So it doesn’t cause me any anxiety.
- amscanne 4y ago
  It’s been “great” for the last forty years because rates have been consistently trending downwards. You’ve never had to think about the downside. Your experience would/will be much different in an environment where rates are rising. Regarding the upside, the rates aren’t much different in the US where you typically have 30 years locked in. Unlike Canada, these also generally have no prepayment penalty, so you can always refinance on rate drops. I’m quite sure the rates on a ARM 5 year or 8 year would be directly comparable to a Canadian mortgage (and you always have that option in the US). There’s lots of great things about Canada, but I think you’re really stretching to see a positive where there isn’t one. (I’m Canadian but I definitely don’t hold a positive view of our financial institutions.)
  - xyzzy123 4y ago
    30 year mortgages are a political guarantee to homeowners. They're don't really come from the lending industry - lenders could not and would not ever create this product on their own. They're a government subsidy to mortgagors enabled by the origination process, obscured by a few hops of financialization. You get a rate guarantee for 30 years plus you can refi, sell or walk away if the bet doesn't go your way. It's pretty much begging to be exploited.
    - barry-cotter 4y ago
      > They're don't really come from the lending industry - lenders could not and would not ever create this product on their own. I was going to quibble with this since I’ve seen fixed rate mortgages in Ireland but… > A fixed rate mortgage is a home loan for which the interest rate is kept the same for an agreed amount of time. The maximum length of time for which a mortgage can be fixed in Ireland is ten years. https://personalbanking.bankofireland.com/articles/my-first-home/looking/fixed-vs-variable-rate-mortgage/#:~:text=A%20fixed%20rate%20mortgage%20is%20a%20home%20loan,so%20what%20is%20a%20variable%20rate%20mortgage%20then%3F https://personalbanking.bankofireland.com/articles/my-first-...
      - xyzzy123 4y ago
        Yes and the rates will tend to be considerably different - you will actually see a risk premium in the longer terms, as you would expect. The fact that "cheap" 30 year fixed rate mortgages only exist in a few countries (US is only one I know of, but it's a big world) is the most accessible evidence that they're created by government policy (without having to dig into the technical details of how they are originated and guaranteed).
        maxerickson 4y ago
        Living in the US, I can't imagine taking out the maximum mortgage that I theoretically qualify for. (without having done it, I think I don't like the idea of 1/2!)
        denimnerd42 4y ago
        It’s pretty easy to take out the maximum if you’re trying to buy a home without contingency on selling your previous one. Since only the monthly payments really matter towards qualification you could be 90% paid off on your first mortgage and still need to work around the DTI limit for your second. When you sell your first everything becomes comfortable again.
  - kevin_nisbet 4y ago
    I don’t think it’s fair to say I’m not aware of the downsides. Yes my own experience is universally in a very aggressive rate environment that could impact my perspective. But I’m also aware that the majority of the time variable rates end up ahead of fixed rates. The term mortgages to me make it a bit closer to variable rates. The rate gets updated every few years. Banks themselves to fund the mortgages don’t get 25 year loans. So as an institution they need to set rates based on risk so they don’t lose money. This risk increases the further you project into the future. So all other things being equal you are not paying a premium to insure against that risk. I’m not commenting on the financial institutions as a whole, or other factors that may lead to higher or lower rates. I’m under the impression that rates are a higher in the us for the 25 year mortgages when calculated off of the overnight rates from the central banks. But I don’t have any data handy to back up the impression for I could be wrong. I suppose having this be an option for the consumer is probably the best option. But for most consumers insuring against rate increases will be quite costly.
    - happyopossum 4y ago
      > But for most consumers insuring against rate increases will be quite costly. I’m not sure how you can make an argument that long and specific while completely ignoring the evidence to the south of you that contradicts it.
  - deleted 4y ago
    [deleted]
- PragmaticPulp 4y ago
  > On my end I think the term mortgages are great since I believe it leads to lower overall interest rates. When rates are going down, yes. But locking in low rates in the United States for 30 years either at purchase time or via refinancing is one of the weirdest advantages of home ownership here. It's surreal to have a 2.x% mortgage locked in for decades when rates are quickly going up and inflation is reducing the relative value of my debt and payments.
  - pishpash 4y ago
    The only way this ends is by running the process in reverse where declining asset prices reduce the gains made on the debt side. If asset prices do not decrease in a rising rate environment, then inflation cannot be controlled. We've baked in 8% annualized real loss somewhere going forward and it will come out of somebody's pockets, but it's still being decided whether asset owners or debtors will pay.
    - chii 4y ago
      > If asset prices do not decrease in a rising rate environment, then inflation cannot be controlled the asset price could remain stable, if the jobs that service those mortgages aren't removed. Inflation of consumables can be controlled, but it is painful. Inflation of assets should not be controlled, even if it could - asset growth represents the wealth of those who invested in it. If this growth is artificially suppressed, millions would lose their retirement funds, and become poorer in the future, and for what?
      - sjfidsfkds 4y ago
        Inflation means there is too much demand in the economy compared to the supply (of goods and labor). Decreased retirement funds are one mechanism by which asset price reductions can lead to people consuming less and working more. More broadly there’s a wealth effect that determines how much people spend.
      - pishpash 4y ago
        Nothing is in a vacuum and wealth only has meaning relatively. As much as it may be a shock to hear, wealth is but a social contract on how much it gets you in exchange. There is no absolute answer on that and it's subject to negotiation. If you are in charge of distributing wealth (which is what this is, let's be honest), higher prices means current asset holders are favored over future asset holders who want to purchase assets. Why should those who invested in a bubble during the loosest money era be entitled to exchange it for the same amount of labor or goods of those who built wealth during austerity?
- refurb 4y ago
  Leads to lower rates? The US 30 year fixed bottomed out at 2-2.5%, which seems about the same as the lowest 5 year fixed in Canada? When Canadians have to renew at 5-7% in a few years that’s going to cause massive havoc.
  - rnd33 4y ago
    On average over a longer period variable rates will always be lower, since the risk premium due to future rate uncertainty will be lower. If that period is a 100 years it won't help lenders much though.
    - refurb 4y ago
      Variables rates will always be lower? At any given point in time, true. But you can lock in a fixed rate that will be lower than a variable rate in the future when rates rise.
- throwawayarnty 4y ago
  Variable rates are great until rates dramatically increase. A huge number of Canadians will not be able to afford their mortgage payments over the next 5 years because they did not calculate rate rises when buying home. Furthermore, they won’t be able to sell the home without taking a huge loss because housing prices will have plummeted due to rate hikes. Combine that with rising cost of food and gas, Canadians are in for a wild ride.
  - nemo44x 4y ago
    I’ve been saying this for a long time now and none of my Canadian friends seem to understand. I guess they’ve only seen rates continue to drop over the last 40 years. But I think people will be shocked when their interest rate is 10% soon. It sounds unthinkable but it’s the only way to get inflation under control. I expect a massive crash in the Canadian home market. In certain areas that have been high fliers I’d expect 50% - 60% declines or larger. Combine exploding interest rates, high inflation, and banning foreign buyers, the housing market is about to get “cheap” for cash buyers.
epgui 4y ago
Most Canadians are extremely over-leveraged, have poor financial literacy, and are more or less YOLO-ing living beyond their means. For most, it’s been more or less working out fine for some time, thus far.
- ffggvv 4y ago
  that’s every western country
mijamo 4y ago
And what about Sweden where people mostly have 3 months rate mortgages and are even more leveraged than Canada? Here sometimes people don't even pay back the principal at all, it's just interests payment every month and waiting for the increase in price to erase your debt. That felt super weird for me coming from France where flexible mortgage rates do not exist. But of course everybody was getting 1% last year, and now it's 1.5% and everybody already feels the difference. If it had to go up to 4% the whole country would be in crisis, and above that well...
- gspr 4y ago
  Same in Norway. Here, banks are required to deny mortgages to people who they do not see as being able to handle much higher rates than on the date the mortgage was taken. Is that not the case in Sweden? (I personally think they should test for even higher rates – I'm terrified to see how many people are in absolute shock that rates are rising rapidly, after being told that exactly that will happen for years)
  - rnd33 4y ago
    It's the same case in Sweden, all new lenders have to be able to handle rates of 6-8%.
  - kqr 4y ago
    I think you overestimate the sophistication of the models the banks use. There's no reason for them to use honest models. If things turn to shit, the public will bail them out anyway. So the banks may well say "if you spend a minimum on food and clothing, and nothing on anything else, you can afford to pay high rates." But that's not what regular people would mean by affording it.
    - gspr 4y ago
      Fair enough, but that doea still mean that higher rates are factored in. Not just as well/strongly as you and I would like.
- msh 4y ago
cperciva 4y ago
Most Canadians don't even realize that longer term mortgages are a thing. In Canada they were effectively banned in 1880; section 10 of the Canada Interest Act says that if you get a loan for more than 5 years you can repay it early -- effectively meaning that a "10 year mortgage" comes with a mandatory (and very large!) interest rate derivative. Since borrowers don't want to pay extra for that derivative -- and frankly are unlikely to be able to afford it even if they wanted it -- we end up with effectively no market in >5 year mortgages. And yes, this is absolutely terrible public policy; forcing Canadians to take a series of short-term mortgages not only makes the economy far more vulnerable to interest rate shocks, but also creates a significant dead weight loss as homeowners and banks repeatedly churn through mortgage application and initiation paperwork.
- bradleyjg 4y ago
  In the US all mortgages have an embedded put option. They are nonetheless affordable, because rather than being privately underwritten mortgages are effectively owned or guaranteed by the government, which sets the rates by political fiat rather than economics.
  - sokoloff 4y ago
    I thought only a subset of mortgages were directly backed (VA, FHA, USDA) and that only conforming mortgages were eligible to be sold to Fannie Mae/Freddie Mac, with non-confirming (colloquially “jumbos”) being entirely privately funded. The non-confirming loan share varies widely over time, but is usually double-digit percentage of overall mortgages.
    - bradleyjg 4y ago
      I believe the Fed also owns some non agency mbs. On top of that bank regulators manipulate capital adequacy requirements to make them more attractive to banks than they would be otherwise.
      - formerkrogemp 4y ago

kevin_nisbet 4y ago

I don’t know that I really count since I’m quite frugal. On my end I think the term mortgages are great since I believe it leads to lower overall interest rates. There’s a lot less risk that gets baked into the price that would be needed for longer terms. I know I’ve compared to other jurisdictions where interest seems way higher. So it doesn’t cause me any anxiety.

amscanne 4y ago
It’s been “great” for the last forty years because rates have been consistently trending downwards. You’ve never had to think about the downside. Your experience would/will be much different in an environment where rates are rising. Regarding the upside, the rates aren’t much different in the US where you typically have 30 years locked in. Unlike Canada, these also generally have no prepayment penalty, so you can always refinance on rate drops. I’m quite sure the rates on a ARM 5 year or 8 year would be directly comparable to a Canadian mortgage (and you always have that option in the US). There’s lots of great things about Canada, but I think you’re really stretching to see a positive where there isn’t one. (I’m Canadian but I definitely don’t hold a positive view of our financial institutions.)
- xyzzy123 4y ago
  30 year mortgages are a political guarantee to homeowners. They're don't really come from the lending industry - lenders could not and would not ever create this product on their own. They're a government subsidy to mortgagors enabled by the origination process, obscured by a few hops of financialization. You get a rate guarantee for 30 years plus you can refi, sell or walk away if the bet doesn't go your way. It's pretty much begging to be exploited.
  - barry-cotter 4y ago
    > They're don't really come from the lending industry - lenders could not and would not ever create this product on their own. I was going to quibble with this since I’ve seen fixed rate mortgages in Ireland but… > A fixed rate mortgage is a home loan for which the interest rate is kept the same for an agreed amount of time. The maximum length of time for which a mortgage can be fixed in Ireland is ten years. https://personalbanking.bankofireland.com/articles/my-first-home/looking/fixed-vs-variable-rate-mortgage/#:~:text=A%20fixed%20rate%20mortgage%20is%20a%20home%20loan,so%20what%20is%20a%20variable%20rate%20mortgage%20then%3F https://personalbanking.bankofireland.com/articles/my-first-...
    - xyzzy123 4y ago
      Yes and the rates will tend to be considerably different - you will actually see a risk premium in the longer terms, as you would expect. The fact that "cheap" 30 year fixed rate mortgages only exist in a few countries (US is only one I know of, but it's a big world) is the most accessible evidence that they're created by government policy (without having to dig into the technical details of how they are originated and guaranteed).
      - maxerickson 4y ago
        Living in the US, I can't imagine taking out the maximum mortgage that I theoretically qualify for. (without having done it, I think I don't like the idea of 1/2!)
        denimnerd42 4y ago
        It’s pretty easy to take out the maximum if you’re trying to buy a home without contingency on selling your previous one. Since only the monthly payments really matter towards qualification you could be 90% paid off on your first mortgage and still need to work around the DTI limit for your second. When you sell your first everything becomes comfortable again.
- kevin_nisbet 4y ago
  I don’t think it’s fair to say I’m not aware of the downsides. Yes my own experience is universally in a very aggressive rate environment that could impact my perspective. But I’m also aware that the majority of the time variable rates end up ahead of fixed rates. The term mortgages to me make it a bit closer to variable rates. The rate gets updated every few years. Banks themselves to fund the mortgages don’t get 25 year loans. So as an institution they need to set rates based on risk so they don’t lose money. This risk increases the further you project into the future. So all other things being equal you are not paying a premium to insure against that risk. I’m not commenting on the financial institutions as a whole, or other factors that may lead to higher or lower rates. I’m under the impression that rates are a higher in the us for the 25 year mortgages when calculated off of the overnight rates from the central banks. But I don’t have any data handy to back up the impression for I could be wrong. I suppose having this be an option for the consumer is probably the best option. But for most consumers insuring against rate increases will be quite costly.
  - happyopossum 4y ago
    > But for most consumers insuring against rate increases will be quite costly. I’m not sure how you can make an argument that long and specific while completely ignoring the evidence to the south of you that contradicts it.
- deleted 4y ago
  [deleted]
PragmaticPulp 4y ago
> On my end I think the term mortgages are great since I believe it leads to lower overall interest rates. When rates are going down, yes. But locking in low rates in the United States for 30 years either at purchase time or via refinancing is one of the weirdest advantages of home ownership here. It's surreal to have a 2.x% mortgage locked in for decades when rates are quickly going up and inflation is reducing the relative value of my debt and payments.
- pishpash 4y ago
  The only way this ends is by running the process in reverse where declining asset prices reduce the gains made on the debt side. If asset prices do not decrease in a rising rate environment, then inflation cannot be controlled. We've baked in 8% annualized real loss somewhere going forward and it will come out of somebody's pockets, but it's still being decided whether asset owners or debtors will pay.
  - chii 4y ago
    > If asset prices do not decrease in a rising rate environment, then inflation cannot be controlled the asset price could remain stable, if the jobs that service those mortgages aren't removed. Inflation of consumables can be controlled, but it is painful. Inflation of assets should not be controlled, even if it could - asset growth represents the wealth of those who invested in it. If this growth is artificially suppressed, millions would lose their retirement funds, and become poorer in the future, and for what?
    - sjfidsfkds 4y ago
      Inflation means there is too much demand in the economy compared to the supply (of goods and labor). Decreased retirement funds are one mechanism by which asset price reductions can lead to people consuming less and working more. More broadly there’s a wealth effect that determines how much people spend.
    - pishpash 4y ago
      Nothing is in a vacuum and wealth only has meaning relatively. As much as it may be a shock to hear, wealth is but a social contract on how much it gets you in exchange. There is no absolute answer on that and it's subject to negotiation. If you are in charge of distributing wealth (which is what this is, let's be honest), higher prices means current asset holders are favored over future asset holders who want to purchase assets. Why should those who invested in a bubble during the loosest money era be entitled to exchange it for the same amount of labor or goods of those who built wealth during austerity?
refurb 4y ago
Leads to lower rates? The US 30 year fixed bottomed out at 2-2.5%, which seems about the same as the lowest 5 year fixed in Canada? When Canadians have to renew at 5-7% in a few years that’s going to cause massive havoc.
- rnd33 4y ago
  On average over a longer period variable rates will always be lower, since the risk premium due to future rate uncertainty will be lower. If that period is a 100 years it won't help lenders much though.
  - refurb 4y ago
    Variables rates will always be lower? At any given point in time, true. But you can lock in a fixed rate that will be lower than a variable rate in the future when rates rise.
throwawayarnty 4y ago
Variable rates are great until rates dramatically increase. A huge number of Canadians will not be able to afford their mortgage payments over the next 5 years because they did not calculate rate rises when buying home. Furthermore, they won’t be able to sell the home without taking a huge loss because housing prices will have plummeted due to rate hikes. Combine that with rising cost of food and gas, Canadians are in for a wild ride.
- nemo44x 4y ago
  I’ve been saying this for a long time now and none of my Canadian friends seem to understand. I guess they’ve only seen rates continue to drop over the last 40 years. But I think people will be shocked when their interest rate is 10% soon. It sounds unthinkable but it’s the only way to get inflation under control. I expect a massive crash in the Canadian home market. In certain areas that have been high fliers I’d expect 50% - 60% declines or larger. Combine exploding interest rates, high inflation, and banning foreign buyers, the housing market is about to get “cheap” for cash buyers.

epgui 4y ago

Most Canadians are extremely over-leveraged, have poor financial literacy, and are more or less YOLO-ing living beyond their means. For most, it’s been more or less working out fine for some time, thus far.

ffggvv 4y ago
that’s every western country

mijamo 4y ago

And what about Sweden where people mostly have 3 months rate mortgages and are even more leveraged than Canada? Here sometimes people don't even pay back the principal at all, it's just interests payment every month and waiting for the increase in price to erase your debt. That felt super weird for me coming from France where flexible mortgage rates do not exist. But of course everybody was getting 1% last year, and now it's 1.5% and everybody already feels the difference. If it had to go up to 4% the whole country would be in crisis, and above that well...

gspr 4y ago
Same in Norway. Here, banks are required to deny mortgages to people who they do not see as being able to handle much higher rates than on the date the mortgage was taken. Is that not the case in Sweden? (I personally think they should test for even higher rates – I'm terrified to see how many people are in absolute shock that rates are rising rapidly, after being told that exactly that will happen for years)
- rnd33 4y ago
  It's the same case in Sweden, all new lenders have to be able to handle rates of 6-8%.
- kqr 4y ago
  I think you overestimate the sophistication of the models the banks use. There's no reason for them to use honest models. If things turn to shit, the public will bail them out anyway. So the banks may well say "if you spend a minimum on food and clothing, and nothing on anything else, you can afford to pay high rates." But that's not what regular people would mean by affording it.
  - gspr 4y ago
    Fair enough, but that doea still mean that higher rates are factored in. Not just as well/strongly as you and I would like.
msh 4y ago

cperciva 4y ago

Most Canadians don't even realize that longer term mortgages are a thing. In Canada they were effectively banned in 1880; section 10 of the Canada Interest Act says that if you get a loan for more than 5 years you can repay it early -- effectively meaning that a "10 year mortgage" comes with a mandatory (and very large!) interest rate derivative. Since borrowers don't want to pay extra for that derivative -- and frankly are unlikely to be able to afford it even if they wanted it -- we end up with effectively no market in >5 year mortgages. And yes, this is absolutely terrible public policy; forcing Canadians to take a series of short-term mortgages not only makes the economy far more vulnerable to interest rate shocks, but also creates a significant dead weight loss as homeowners and banks repeatedly churn through mortgage application and initiation paperwork.

bradleyjg 4y ago
In the US all mortgages have an embedded put option. They are nonetheless affordable, because rather than being privately underwritten mortgages are effectively owned or guaranteed by the government, which sets the rates by political fiat rather than economics.
- sokoloff 4y ago
  I thought only a subset of mortgages were directly backed (VA, FHA, USDA) and that only conforming mortgages were eligible to be sold to Fannie Mae/Freddie Mac, with non-confirming (colloquially “jumbos”) being entirely privately funded. The non-confirming loan share varies widely over time, but is usually double-digit percentage of overall mortgages.
  - bradleyjg 4y ago
    I believe the Fed also owns some non agency mbs. On top of that bank regulators manipulate capital adequacy requirements to make them more attractive to banks than they would be otherwise.
    - formerkrogemp 4y ago