Bank of Canada Warns Policymakers Against Tinkering With Mortgages

The Bank of Canada (BoC) is cautioning policymakers against making quick adjustments to mortgage regulations to address affordability concerns. Deputy Governor Carolyn Rogers emphasized that short-term fixes, such as extending mortgage amortizations, might appear helpful but can lead to larger financial issues in the future. For example, while extending a mortgage from 25 to 30 years can lower monthly payments by around $200, it could result in an additional $50,000 in interest over the loan's lifespan. This extra cost not only strains borrowers but also slows broader economic activity, diverting funds from more productive uses.

The BoC has expressed particular concern about balancing affordability with financial stability. Efforts to lower short-term borrowing costs often encourage more debt, which can push home prices higher and further erode affordability. This reflects lessons from decades of low interest rates, which allowed Canadians to absorb rising home prices rather than genuinely improving affordability. Rogers reiterated that true affordability stems from addressing the imbalance between housing supply and demand, a long-term challenge requiring sustained focus.

Government interventions, such as relaxing mortgage regulations, could also undermine the central bank's monetary policies. While the BoC has been tightening credit conditions to cool the overheated housing market, some regulatory changes might dilute these efforts. Rogers warned that overreliance on these measures could harm the economy and households in the long run by creating moral hazards and exacerbating risks tied to high leverage.

The BoC’s stance aligns with a broader understanding that financial stability depends on measured responses rather than quick fixes. Policymakers are urged to resist the temptation to “tinker” with mortgage rules excessively, as such actions might lead to unintended consequences, including heightened economic vulnerabilities.

While there is acknowledgment of the affordability crisis, the BoC highlighted the need for patience in achieving a sustainable solution. Addressing the housing market’s deep-rooted issues, such as supply shortages, requires more than short-term regulatory shifts. The institution encouraged a focus on long-term strategies to build a stable housing market without exacerbating financial risks.

Ultimately, the BoC’s message underscores the complexity of the housing affordability issue in Canada. It calls for thoughtful collaboration between policymakers and financial institutions to create conditions that support both household resilience and economic stability over time.