3 Huge Differences Between U.S. and Canadian Mortgages

As housing reform continues to be part of the Obama administration's agenda, differences between the mortgage market in the United States and that of other countries have come to light. For instance, how do domestic mortgage products differ from those offered in Canada, a country considered the most comparable to the Unites States?

Here are three critical differences between the home lending market here and in our closest neighbor to the north.

30-year mortgages? Never heard of them
While the 30-year, fixed-rate mortgage has become a staple in the U.S., Canada doesn't offer anything remotely similar. The longest term for a home loan in the North Country is five years, with the amount amortized over a 25-year period. Canadian banks also offer fixed-rate mortgages for two-year, three-year, and four-year terms. 

This means Canadians can never count on having a particular loan interest rate last more than five years. At the end of the loan's life span, borrowers can refinance, but prepaying a loan early to take advantage of a drop in rates can cost mortgage customers dearly, as prepayment fees are quite hefty.

Portable loans? You bet
Prepayment may be a no-no in neighboring Canada, but mortgages are attached to the borrower, not the property -- which means they can be transferred to a new home, just like the homeowner. If the new abode is pricier, another loan is taken out to make up the difference, and mortgage insurance is shifted right along with the loan. If rates have risen since the original loan was written, the bulk of the mortgage will be protected against the hike.

Mortgage interest deduction stops at the border
Another key difference is that mortgage interest isn't deductible in Canada, a tax break dearly cherished in the United States. While this may look like a real disadvantage to the Canadian system, it is also protective: There is simply no incentive for homeowners to borrow more than they need, or to maintain high levels of mortgage debt.

Though only around 30% of U.S. taxpayers deduct their mortgage interest each year – and the tax break disproportionately benefits those with high incomes -- efforts to end the deduction have not been successful.

Why are the differences so huge?
The difference in mortgage markets between the U.S. and Canada seem to stem mainly from this issue: The U.S. openly supports homeownership, whereas Canada freely admits that it does not, at least not more than other types of housing, such as rentals and transitional housing.

In the rest of the world, 30-year mortgages are uncommon. Most countries, outside the U.S. and Denmark, don't offer them at all. Before the Great Depression, even U.S. borrowers generally took out short-term mortgages, which were paid off or refinanced when the term ended.

Which mortgage style is better?
There are advantages to both, but U.S. homeowners are smitten with the 30-year loan, the longer term and stability of which enable borrowers to plan far into the future. The Canadian system, however, isn't onerous – and affords stability to the entire housing market, as well as the financial system. Making short-term loans enables banks to lend from their own deposits, and Canadian banks are encouraged to keep loans on their own balance sheets.

Since the financial crisis, U.S. mortgages have become much less risky. New mortgage rules that took effect in the U.S. last month should help preserve this environment -- compelling banks to ensure that borrowers can repay their loans, and requiring banks that don't follow the tighter guidelines to keep riskier loans on their books.

Though 30-year mortgages didn't cause the housing crisis, more prudent lending practices should help prevent another such debacle -- and maintain the home-financing choices U.S. homeowners currently enjoy.

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  • Report this Comment On February 23, 2014, at 11:07 PM, EJSe wrote:

    Three clarifications are in order with respect to Canadian residential mortgage rules:

    1. A lot of mortgages include a provision allowing the

    mortgagors (the homeowner) to pay up to 10% extra every year of the scheduled payments without penalty.

    2. Fraser Smith came up with the epynomous <risk on> Smith Maneuver to convert mortgage debt into deductable investment debt. You borrow against your home equity to earn income and reduce taxes. The income and the tax savings are put towards your mortgage balance.

    3. Mortgage insurance is not mandatory if your down payment is 20% or more of the property purchase price.

  • Report this Comment On March 04, 2014, at 11:43 PM, TimRules wrote:

    This article is completely wrong:

    - 30-year mortgages are very common in Canada, 35-year mortgages are also available (usually at a small price premium)

    - Only new insured mortgages (typically less than 20% equity) are limited to 25 years

    -Standard prepayment options are 20% / 20% in Canada; Borrowers are allowed to increase payments by up to 20% AND repay up to 20% of the original principal balance in any calendar year

    -Mortgages are not 'attached' to the Borrower any more than the the Property: most mortgages in Canada are both Portable (Borrower can take to a new property) and Assumable (Purchaser can take-over Seller's mortgage)

    ... I stopped reading at that point.

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