Would extending mortgage amortization periods make cottages more affordable?

The Canadian Mortgage and Housing Corporation is not in favour of extending the amortization period for mortgages. While extending the amortization period would make it easier for new buyers to break into the market with lower monthly payments, the corporation notes that doing so would only increase the demand for housing (including cottages), which would inflate the already overinflated cost of housing in Canada.

As interest rates rose from 0.25 percent to the current 4.75 per cent over the past year, this forced most existing variable-rate mortgage holders to have their amortization period extended well beyond the 30-year period if they were unable to increase their monthly payment. But the CMHC is against this extension becoming the new normal.

“Increasing the amortization period for insured mortgages would create more demand for housing in an already supply constrained environment,” says Aled ab Iorwerth, the deputy chief economist at the Canada Mortgage and Housing Corporation. “This increases the purchasing power of individuals, which would just get capitalized into the cost of housing, worsening housing affordability.”

While in theory, helping new buyers break into the housing market is a necessary good—according to CMHC, buyers taking on significant mortgages they struggle to afford only serves to greatly increase demand. Increased demand has already led to the skyrocketing cost of homes and cottages the country has experienced in recent years, so extending the amortization period would create an even larger issue in housing affordability.

ab Iorwerth also points to the household debt level, noting Canada “has the highest level of household debt in the G7—this makes the economy vulnerable to any global economic crisis.”

With 75 per cent of household debt in Canada being mortgage debt alone, extending the amortization period would serve to increase that percentage and increase overall household debt. Household debt already rose from 95 per cent of Canada’s GDP in 2010 to 107 per cent in 2021.

“Re-establishing housing affordability in Canada will be key to reducing household debt,” says ab Iorwerth. “And in order to do that, we should focus on creating more housing options and increasing supply across the housing spectrum versus making it easier for people to borrow more money.”

With cottage prices finally starting to soften post-pandemic, according to a recent study from Royal LePage, buyers looking to break into the market will have a better chance of keeping and increasing these gains without adding a longer amortization period to their mortgage.