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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
by 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 agoIn 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 agoI 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 agoI 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 agoNotably, this will no longer be the case as the Fed unwinds its balance sheet.
- bradleyjg 4y agoIf, not when.
- xhrpost 4y agoThis site says 50% but the data is a bit old. I remember seeing other sites in the past year quoting percentages in the 90's. https://www.integritylending.com/understanding-what-a-federally-backed-mortgage-loan-means/#:~:text=About%2050%25%20of%20all%20mortgage,FHA https://www.integritylending.com/understanding-what-a-federa...
- eru 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. Doesn't that just mean that the government gives home owners free put options? Yet another instance of welfare for the well-off?
- nivenkos 4y agoFWIW it's a similar situation in Sweden too. The real issue is the prices having gone up so high to begin with.
- AzzieElbab 4y ago3-5 term Canadian mortgages carry pretty large penalties attached in case you decide to sell your place midterm
- legulere 4y agoWe have the same in Germany at 10 years. People still their loans fixed for 15, 20 or 30 years very commonly.