Could 10-year mortgage terms help ease ‘payment shock’ for Canadians? What to know

Desjardins says amid interest rate hikes, if the option to lock in with a 10-year mortgage term was more promoted and available, "payment shock" would have been more manageable.

Many Canadian homeowners have felt the pain of higher interest rates when it’s come time to renew their mortgage, but a new report from Desjardins says if 10-year terms were more prevalent and attractive, it could have helped lessen the “payment shock.”

When Canadians look at fixed mortgage rates, they often choose to lock into terms up to five years — the length of time your contract is in effect before renewal.

The report says with interest rates declining for years prior to the COVID-19 pandemic, households were “incentivized to borrow at short terms.”

But when the central bank started raising rates in March 2022, those in a short-term mortgage contract began facing renewal at a higher rate.

“Canada is among the countries where the debt service ratio is rising the fastest,” Jimmy Jean, Desjardins vice-president and chief economist told Global News.

“The reason is that we have that renewing feature in our mortgages that many other countries don’t have or have other ways to mitigate. That demands a level of sacrifice on the part of homeowners with mortgages that you don’t see elsewhere.”

According to its analysis, Desjardins says if the option to lock in with a 10-year mortgage term was more promoted and available, “payment shock” would have been more manageable when they go to renew even after rates have risen. It even suggests the mortgage stress test — which sees Canadians qualify for a mortgage at rates higher than what they’ll be paying as a buffer against rate hikes — would be less necessary.

“If you’re able to lock somebody in for 10 years, what do you need a stress test for if that person is not going to be dealing with an interest rate shock over the next 10 years,” Jean added.