Another solution is a graduated payment mortgage (GPM), a fixed-rate mortgage with an amortization schedule that starts with lower payments, which gradually increase over time. The purpose of this type of mortgage is to allow homeowners to begin with lower monthly payments. In the US, the Federal Housing Authority offers GPMs that can be structured as:

•         A 5-year initial period with payment increases of 2.5%, 5%, or 7.5% annually

•         A 10-year initial period with a 2% annual increase

With GPMs, the loan balance initially increases before it begins to decrease. This happens because the early payments may not cover the full interest cost, leading to negative amortization. 

While GPMs offer the advantage of lower initial payments, which can make it easier for borrowers to qualify for a mortgage, they have higher overall costs, complexity, and the risk of negative amortization. The product relies on the assumption that the borrower’s income will grow over time. In Canada, when GPMs were introduced in the past, lenders were hesitant to offer them. The current mortgage stress test may also limit the flexibility needed for borrowers to qualify for these products.

CMHC has explored a number of these solutions to address affordability challenges in the past. It might be time to revisit the archives to see what past solutions might work today. While implementing these solutions on a national level might increase demand and potentially be counterproductive, they could be effective if applied to specific, targeted borrower segments.