Crossing the border: comparing Canadian and American mortgages

You might assume that a mortgage in the U.S. isn’t all that different from a mortgage in Canada. After all, when you share a border with one of the biggest (and loudest, and most influential) countries on the planet, there are going to be some things that you share.

In some ways, this assumption is true -- the process itself is similar, with a borrower having to qualify for a mortgage based on your credit history and your income, as well as your current debts. In Canada, this vetting process can take a few days, while in the U.S., it can take much longer – a month or more.

“There’s always the debate on who has the better mortgage program,” says Miles Zimbaluk, a Canadian mortgage broker who works with Canada to Arizona, a company that provides U.S. mortgage lending options to Canadians. The more details you know, however, the more you’ll see that there are more differences in than similarities when it comes to mortgage lending in the two countries, and it’s not as clear-cut as one country having “better” mortgages than the other.

Mortgage terms and amortization

In Canada, mortgage amortization periods are usually 25 years, although 30-year amortizations are possible. Within that amortization period are terms, periods during which the terms of the mortgage and the interest rate of the mortgage will hold steady. At the end of that term, which ranges from as short as 6 months to as long as 10 years, you renew and/or renegotiate your mortgage terms as well as get the going interest rate, which will almost always be different from the one you had during your previous term.

In the States, the amortization period can also go up to 30 years – or longer – but if you want, you can lock in your rate and terms for the life of your mortgage. You read that right: if you wanted to pay the exact same rate for the next 25 or 30 years, then you could have the option to do so.

Long-term fixed rate mortgage products offered in the States are generally competitive with their shorter-term counterparts. In Canada, on the other hand, the interest rates for even a 10-year fixed mortgage term are at least a full percentage higher than a five-year fixed mortgage, and often even more than three percentage points higher.

Rates and fees

CIBC economist Benjamin Tal points out in a 2012 consumer report that “the fact that a typical mortgage in the US is for 30 years compared to a typical 5-year term in Canada makes Canadian borrowers more sensitive to the impact of interest rate hikes.”

Even so, Zimbaluk says that the risk is very low for radical rate increases.

“The low-interest environment like we have in Canada, there’s not a lot of risk of severe increases in the rates these days. We’re not expecting rates to go very high at all, so it’s a lot more stable than it used to be, I think, than in the past, when mortgage rates would get into the five, six, seven, eight per cent range . . . that’s good for consumers because they don’t have to worry about huge increases at renewal.”

Overall, mortgage interest rates are currently higher in the U.S. than in Canada. In the States, mortgage interest is applied to the mortgage monthly, and in Canada that mortgage interest is applied semi-annually. The semi-annual compounding benefits Canadian homeowners more so than their American counterparts. Although Canadians save money in interest, they will pay much more for breaking their mortgage in the middle of a term, which is common practice. In the U.S., mortgages cost more to set up, but are more flexible for the duration.

“In Canada, you’re going to get a mortgage where you’re going to be locked into your say, five-year fixed term, and you’re going to be allowed to only pay small percentages onto that mortgage extra if you want to without a penalty. There’s going to be a penalty to get out of that mortgage,” Zimbaluk says. “Where in the U.S., we’ve got a larger fee to get set up in the beginning, but that mortgage is always fully open, so you can pay it off at any time without a penalty.”

In both the U.S. and Canada, you can refinance your mortgage to pull equity out of your home and/or take advantage if interest rates drop. If you were to break your mortgage and refinance in Canada, however, you’ll pay a penalty to get out of your current mortgage. In the U.S., you won’t pay to get out, but you’ll pay closing costs again to establish your new mortgage.

What about the tax man?

One big advantage homeowners have in the U.S. is that mortgage interest is tax deductible.

“People want homes because of that, because that can save you a lot of money,” Zimbaluk says. “If you have a mortgage payment that’s similar to a rent payment, you’re actually way ahead because you’re writing off a lot of that money in taxes so it gets you ahead of the game. So people definitely want to be homeowners down here much more so than they want to in Canada.”

Mortgage interest is not tax deductible for homeowners in Canada, which means that buying a home isn’t as financially advantageous every year. There’s also no incentive to have a larger mortgage for the tax credits.

What happens if you default?

When the economy tanked and hundreds of thousands of homeowners in the U.S. couldn’t afford to make their mortgage payments, a lot of them simply stopped paying and either walked away from their home or sent the keys back to their lender (what came to be known as “jingle mail”). In a handful of states, lenders have no recourse for those borrowers to recover the money that they lost from those unpaid mortgages. In most provinces in Canada, that’s not allowed. Sure, you can walk away from your mortgage, but your lender and/or mortgage insurer will come after you for the outstanding mortgage, regardless of whether or not you’re still physically living in the home.

Harder north of the border?

Lenders themselves operate differently in Canada and the U.S.

“As a mortgage broker in Canada, we find that basically there are let’s say, 40 or 50 lenders lending through the broker networks. So we’ve got our ‘Big Five’ banks, and all the smaller lenders. They’re highly regulated, there’s a lot of restrictions, a lot of the lending guidelines are basically regulated or exactly the same no matter who the [lender] is that you go to. In the U.S., it’s almost like the Wild West,” Zimbaluk says. “There are literally thousands of banks and little mom-and-pop-shop lenders that have their own guidelines and make up their own rules.”

He goes on to say that there are a lot more options out there for U.S. consumers, but not all of them are regulated nearly as tightly and uniformly as Canadian lenders. Instead, every state is different, and everyone’s got their own rules.

“I believe Canada is much more advanced in that regard.” Zimbaluk says.

Another difference is the risk tolerance between Canadian lenders and lenders in the U.S. Both countries require borrowers with a down payment of less than 20 per cent to get mortgage default insurance, called private mortgage insurance (PMI) in the States. When Canadians get mortgage, though, it’s for the life of the loan. When Americans get PMI, borrowers can request for it can be eliminated once there is 20 per cent equity in the home, and lenders are required to cancel it if the borrower has 22 per cent equity in their home. This means that there’s a greater number of mortgages in the States that aren’t backed by insurance should they go into default.

That being said, Zimbaluk says that things have changed since the meltdown in the U.S., and mortgage lenders in the U.S. are much more conservative than it used to be when it comes to vetting borrowers.

“I think since the meltdown, regulations have got a lot more strict in the U.S. The time to complete your mortgage takes a lot longer, and sometimes there’s paperwork, they put a lot more restrictions in and a lot more fine print into their mortgage lending. I think the big advantage for consumers is that they can get out of their mortgage; they aren’t locked in with a penalty like we are in Canada. That difference is a big advantage in the U.S.”

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