Canadian Mortgages vs. American Mortgages – Part I

November 3, 2017

There are a lot of reasons to be interested in Canadian versus American home mortgages these days. Not only do our respective economies have great influence on one another, Canadians hold the number one spot for foreign housing investment south of the border. There are, however some very real differences to be mindful of. So, whether you’re thinking of becoming a snowbird or simply want an investment property, here’s some information to get you started.

AMORTIZATION & FIXED RATE MORTGAGES

As published by Which Mortgage, known as Canada’s only independent mortgage website, the amortization period in the US and Canada is usually about the same (25 years). What differs considerably is the rate at which your mortgage remains over this amortization period.

In the United States, long-term fixed-rate mortgages are far more ubiquitous than in Canada. In Canada, interest rates on a 10-year fixed mortgage term are always higher than a five-year fixed mortgage, whereas in the US, you may have a long-term fixed rate mortgage of 10 years or more. In other words, if you take out a mortgage with a long-term fixed rate in the US, you will be less vulnerable to a sudden hike in interest rates whereas in Canada, you are typically refinancing every 5 years or so.

A Los Angeles Times article on the subject reported, “The standard mortgage in Canada isn’t the 30-year fixed, as it is in the U.S., but a five-year mortgage amortized over 25 years. That means the loan balance has to be refinanced at the end of five years, exposing the borrower to any increase in rates that has occurred in the interim. Prepayment penalties for borrowers hoping to exploit a decline in rates, on the other hand, are very steep.”

Which leads us to one of the more contrasting differences.

CANADIAN BANKS ARE MORE PROTECTED

The same LA Times article went on to note that the Canadian system is clearly a win for banks, which are far more protected than in the US. However, it also addresses the issue of flexibility. “Canadian mortgages are also portable — if you move before the five-year term is up you can apply your old mortgage to your new home. (If it’s a more expensive home, you take out a new loan for the excess.) That restores some of the balance in the borrower’s favour.”

While we don’t take ourselves too seriously here north of the border, when it comes to defaulting on a mortgage, it is a somber affair. Lenders and mortgage insurers have more power in Canada than in the US, and should you default, they will hold you liable. On the other hand, the 2008 housing crisis means increasingly stringent regulations for borrowers seeking a mortgage from the large federal institutions.

NON-RECOURSE US STATES

If you do decide to buy property in the US, it’s wise to find out whether the state where you plan on making a purchase is a non-recourse state. These are states where lenders have no recourse in recovering money lost due to unpaid mortgages. According to an article in Business Insider, there are 11 states classified as “non-recourse” in a working paper published by the Richmond Fed in 2010. In these states, the banks only recourse in collecting on a default loan is limited to the value of the home. If the debt itself exceeds the value of the home, the lender is usually prevented from collecting the remainder of the debt.

US non-recourse states include Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, and Wisconsin.

NON-RECOURSE CANADIAN PROVINCES

You may be surprised to find out that Canada has two of its own non-recourse provinces: Alberta and Saskatchewan. However, a mortgage is considered non-recourse only if it isn’t insured by CMHC, the government’s mortgage insurer. Otherwise, the CMHC can pursue the borrower for whatever amount is outstanding.